F-1 1 d166695df1.htm F-1 F-1
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As filed with the Securities and Exchange Commission on October 8, 2021.

Registration No. 333-                    

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Evotec SE

(Exact Name of Registrant as Specified in Its Charter)

 

 

Not Applicable

(Translation of Registrant’s name into English)

 

 

 

Federal Republic of Germany   2836   NOT APPLICABLE

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

Essener Bogen 7

22419 Hamburg

Germany

Tel: +49 40 560810

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Evotec (US) Inc.

303B College Road East

Princeton, NJ 08540

Tel: (732) 329-2355

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

Copies to:

 

Sophia Hudson, P.C.

Morgan Hill

Kirkland & Ellis LLP

601 Lexington Avenue

New York, New York 10022

(212) 446-4800

 

Prof. Dr. Christoph H. Seibt

Freshfields Bruckhaus Deringer

Rechtsanwälte Steuerberater PartG mbB

Hohe Bleichen 7

20354 Hamburg

Germany

+49 40 36 90 60

 

Nathan Ajiashvili

Alison Haggerty

Oliver Seiler

Latham & Watkins LLP

1271 Avenue of the Americas

New York, New York 10020

(212) 906-1200

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

Emerging growth company  ☒

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class Of Securities To Be Registered(1)   Proposed Maximum
Aggregate Offering Price(2)
 

Amount of

Registration Fee

Ordinary shares, no par value per share

  $100,000,000   $9,270

 

 

(1)

All ordinary shares will be represented by American Depositary Shares, or ADSs, with each ADS representing one-half of one ordinary share. ADSs issuable upon deposit of the ordinary shares registered hereby will be registered pursuant to a separate Registration Statement on Form F-6.

(2)

Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. Includes the additional ordinary shares that the underwriters have the option to purchase.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.


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The information in this prospectus is not complete and maybe changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. The prospectus is not an offer to sell these securities nor a solicitation of an offer to buy these securities in any jurisdiction where the offer and sale is not permitted.

 

Subject to Completion

Preliminary Prospectus, dated October 8, 2021

PROSPECTUS

            American Depositary Shares

 

 

LOGO

Representing                Ordinary Shares

 

 

This is the initial public offering of American Depositary Shares, or ADSs, representing            ordinary shares of Evotec SE. We are offering             ADSs, assuming a public offering price of $                per ADS, based on the closing price of our ordinary shares on the Frankfurt Stock Exchange on                , 2021, of €                 and assuming an exchange rate of $                per euro.

Each ADS represents one-half of one ordinary share. Our ordinary shares have no par value.

We have applied to list the ADSs on the Nasdaq Global Select Market under the symbol “EVO.” Our shares are listed on the Frankfurt Stock Exchange under the symbol “EVT” and under the ISIN DE0005664809.

Investing in the ADSs involves a high degree of risk. See “Risk Factors” beginning on page 14 of this prospectus.

We are an “emerging growth company” and a “foreign private issuer” as defined under the U.S. federal securities laws and, as such, will be eligible for reduced public company disclosure requirements. See “Prospectus Summary—Implications of Being an Emerging Growth Company and a Foreign Private Issuer” for additional information.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

    

Per ADS

      

Total

 

Public offering price

       $                  $        

Underwriting discounts and commissions(1)

       $                  $        

Proceeds to Evotec SE before expenses

       $                  $        

 

  (1)

We have agreed to reimburse the underwriters for certain expenses incurred in this offering. See “Underwriting” for details.

We have granted the underwriters an option for a period of 30 days from the date of this prospectus to purchase an additional                ADSs. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by us will be $                , and the total proceeds to us, before expenses, will be $                .

Delivery of the ADSs is expected to be made on or about                    , 2021.

 

 

Lead Joint Book-Running Managers

 

BofA Securities   Morgan Stanley

Joint Book-Running Managers

 

Citigroup   Jefferies   Cowen     RBC Capital Markets  

 

 

Prospectus dated                    , 2021


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TABLE OF CONTENTS

 

ABOUT THIS PROSPECTUS

     ii  

PRESENTATION OF FINANCIAL INFORMATION

     iii  

TRADEMARKS, SERVICE MARKS AND TRADE NAMES

     iv  

MARKET AND INDUSTRY DATA

     v  

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     14  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     61  

USE OF PROCEEDS

     63  

DIVIDEND POLICY

     64  

CAPITALIZATION

     65  

DILUTION

     66  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     68  

BUSINESS

     97  

MANAGEMENT

     140  

RELATED PARTY TRANSACTIONS

     153  

PRINCIPAL SHAREHOLDERS

     154  

DESCRIPTION OF SHARE CAPITAL AND ARTICLES OF ASSOCIATION (SATZUNG)

     156  

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

     173  

SHARES AND ADSS ELIGIBLE FOR FUTURE SALE

     182  

EXCHANGE CONTROLS AND LIMITATIONS AFFECTING SHAREHOLDERS

     184  

TAXATION

     185  

UNDERWRITING

     200  

EXPENSES OF THE OFFERING

     209  

LEGAL MATTERS

     210  

EXPERTS

     211  

CHANGE IN AUDITOR

     211  

SERVICE OF PROCESS AND ENFORCEMENT OF LIABILITIES

     212  

WHERE YOU CAN FIND MORE INFORMATION

     213  

INDEX TO FINANCIAL STATEMENTS

     F-1  

We have not, and the underwriters have not, authorized anyone to provide you with information that is different from that contained in this prospectus, any amendment or supplement to this prospectus, or any free writing prospectus we may authorize to be delivered or made available to you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the underwriters are offering to sell ADSs and seeking offers to purchase ADSs only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date on the cover page of this prospectus, regardless of the time of delivery of this prospectus or the sale of any ADSs. Our business, financial condition, results of operations and prospects may have changed since the date on the cover page of this prospectus.

For investors outside the United States: Neither we nor the underwriters have taken any action that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of our ADSs and the distribution of this prospectus outside of the United States.

 

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ABOUT THIS PROSPECTUS

The prospectus summary beginning on page 1 below highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before deciding to invest in our ADSs, you should read this entire prospectus carefully, including the sections titled “Risk Factors,” “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. Unless otherwise indicated or the context otherwise requires, all references in this prospectus to the terms “Evotec,” the “Company,” the “group,” “we,” “us” and “our” refer to Evotec SE and our wholly-owned subsidiaries.

 

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PRESENTATION OF FINANCIAL INFORMATION

This prospectus includes the historical financial statements listed below:

 

   

our unaudited consolidated financial statements as of and for the six months ended June 30, 2021 and 2020, which have been prepared in accordance with International Financial Reporting Standards, or IFRS, applicable to interim financial reporting (IAS 34), as issued by the International Accounting Standards Board, or IASB, which differ in certain significant respects from U.S. generally accepted accounting principles, or U.S. GAAP; and

 

   

our audited consolidated financial statements as of and for the years ended December 31, 2020 and 2019, which have been prepared in accordance with IFRS as issued by the IASB, which differ in certain significant respects from U.S. GAAP.

Our financial information is presented in Euros. For the convenience of the reader, we have translated some of our financial information into U.S. dollars. Unless otherwise indicated, these translations for the financial information as of and for (i) the years ended December 31, 2020 and 2019 were made at the rate of €1.00 to $1.2230, the noon buying rate of the Federal Reserve on December 31, 2020 and (ii) the six months ended June 30, 2021 and June 30, 2020 were made at the rate of €1.00 to $1.1848, the noon buying rate of the Federal Reserve on June 30, 2021. Such U.S. dollar amounts are not necessarily indicative of the amounts of U.S. dollars that could actually have been purchased upon exchange of Euros at the dates indicated. All references in this prospectus to “$” mean U.S. dollars and all references to “€” mean Euros.

We have made rounding adjustments to some of the figures contained in this prospectus. Accordingly, numerical figures shown as totals in some tables may not be exact arithmetic aggregations of the figures that preceded them.

Use of Non-IFRS Measures

To measure performance, we focus on net income, an IFRS measure, as well as certain non-IFRS measures including Adjusted EBITDA.

We define Adjusted EBITDA as net income (loss) adjusted for interest, taxes, depreciation and amortization of intangibles, impairments on goodwill and other intangible and tangible assets, total non-operating results and change in contingent consideration (earn-out).

Adjusted EBITDA should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with IFRS. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for information about why we consider Adjusted EBITDA useful and a discussion of the material risks and limitations of this measure, as well as a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure prepared in accordance with IFRS.

 

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TRADEMARKS, SERVICE MARKS AND TRADE NAMES

The Evotec SE logo, Evotec, Evotec International, Just, the Just logo, J.POD®, Abacus, Aptuit, the Aptuit logo, Evotec INDiGO, Aptuit INDiGO, Cyprotex and other trademarks or service marks of Evotec appearing in this prospectus are the property of the Company. Solely for convenience, some of the trademarks, service marks, logos and trade names referred to in this prospectus are presented without the ® and symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and trade names. This prospectus contains additional trademarks, service marks and trade names of others. All trademarks, service marks and trade names appearing in this prospectus are, to our knowledge, the property of their respective owners. We do not intend our use or display of other companies’ trademarks, service marks, copyrights or trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

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MARKET AND INDUSTRY DATA

This prospectus contains industry, market and competitive position data that are based on industry publications and studies conducted by third parties as well as our own internal estimates and research. These industry publications and third-party studies generally state that the information they contain has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that each of these publications and third-party studies is reliable, forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and uncertainties as the other forward-looking statements contained in this prospectus. These forecasts and forward-looking information are subject to uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause results to differ materially from those expressed in our forecasts or estimates or those of independent third parties. While we believe our internal research is reliable and the definitions of our market and industry are appropriate, neither such research nor these definitions have been verified by any independent source.

 

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PROSPECTUS SUMMARY

Overview

We are an industry-leading drug discovery and development partner for the pharmaceutical and biotechnology industry. Our mission is to discover best and first-in-class medicines for a broad range of difficult to treat diseases in collaboration with our partners. To that end, we have built a comprehensive suite of fully integrated, next generation technology platforms which we believe will transform the way new drugs are discovered. By leveraging the advanced capabilities of our integrated platforms, we are able to provide solutions to our partners that enable significant improvements in the quality of new drugs while accelerating the drug discovery process and reducing the high cost of attrition often associated with traditional drug discovery processes.

Traditional drug discovery is a lengthy, costly and complex process that is subject to a high degree of uncertainty and high rates of failure. In addition, identifying novel compounds requires extensive screening and in vitro and in vivo testing, which can be both labor intensive and time-consuming. For every successful medicine that is commercialized, there are 5,000 to 10,000 compounds that fail in drug discovery. Moreover, it takes approximately 12 years of intense research and development and approximately $2 billion for a new medicine to reach patients.

In order to address demand for faster, cheaper and better outcomes of early-stage drug discovery processes, we deliver fully-integrated drug discovery and development programs to our partners. Our expertise in deep learning and computational approaches and the integration of such knowledge across the full value chain of research, drug discovery and development is industry-leading. We possess capabilities across the early stages of precision medicine discovery, including biomarker selection, human pharmacokinetics (PK) testing, clinical trial planning, safety assessment and manufacturability. We achieve differentiated results by integrating these firmly-established R&D capabilities, cutting edge proprietary technologies and the knowledge of our experienced scientists. Our drug discovery therapeutic area expertise and capabilities covers diabetes and its complications, fibrosis, infectious diseases, CNS diseases, oncology, pain and inflammation, immunology, rare diseases, respiratory diseases, and women’s health. For the foreseeable future, a substantial majority of revenues generated from the offerings to our partners will be based on “fee-for-service” agreements or FTE-based arrangements, recognized across both our reporting segments, EVT Execute and EVT Innovate. Subject to the degree of integration of proprietary technologies, or if alliances are built on the basis of in-house R&D projects as part of EVT Innovate, we may also benefit from milestone payments and royalties.

Recent scientific and technological advancements, including the advent of patient specific disease modelling based on induced pluripotent stem cells (“iPSC”), genomics, transcriptomics, proteomics and metabolomics, have significantly shifted the understanding of molecular biology, cell regulation and the pathogenesis of individual diseases. As scientific research advances rapidly towards understanding diseases on a molecular level and the development of personalized therapies, the need has increased for new platforms, tools and methods to better understand, interpret and translate the vast information and data that is being generated.

Over the past 25 years and in response to the challenges of the dynamic industry we serve, we have positioned Evotec at the forefront of this revolution in drug discovery, emphasizing disease, patient and drug relevance at the beginning of the drug discovery process. Based on our industry knowledge and public disclosure by industry participants, we believe that we are the only company among our identified competitors that offers chemistry, biology, transcriptomics, proteomics and iPSC-based disease modelling with multi-modality expertise across small molecules, biologics, antisense, cell and gene therapy, as well as manufacturing capabilities that span the drug development continuum, from discovery through commercialization. We have developed proprietary artificial intelligence and machine learning (“AI/ML”) capabilities that facilitate industry-leading data generation,


 

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data analytics and efficacy prediction. We believe the integration of these platforms, in a holistic way, results in differentiated scientific disease insights, operational efficiencies and technological capabilities allowing us to drive rapid progress and successful outcomes throughout the discovery and pre-clinical development phase where innovation is most critical.

With more than 3,000 scientists, we leverage our technologies and platforms to develop precision medicines across multiple modalities, with the aim of ultimately making the right drug available to the right patient. Our drug candidates can be created at a more affordable cost (at up to half the cost of current benchmarks for discovery through investigational new drug (“IND”) application) than those currently generated by industry players, and at a faster speed (at up to 30% less time than existing benchmarks for discovery through IND application). As an example, together with Bayer, we published a white paper showing that our endometriosis project entailed a total cost to IND of €30 million, which is significantly lower than the industry benchmark of approximately $75 million (€63 million) and that the first of three clinical candidates under the collaboration was progressed to IND in less than four years, 30% less than industry benchmarks. Our ability to save time during development is important for our partners and ourselves as the potential to reach IND up to 18 months faster than the competition generates real added value in a competitive marketplace for innovative breakthrough medicines. Our work to date has resulted in 11 disclosed pipeline assets in clinical development, and over 100 pipeline assets in the discovery and preclinical phase. Moreover, we have developed a broad multi-disciplinary network of collaborations with over 800 partnerships across the pharmaceutical and biotechnology industry and academia.

We report the results of our work and collaborations through two operating segments:

 

   

EVT Execute: primarily includes fee-for-service and full-time-equivalent (“FTE”)-rate based arrangements where our customers own the intellectual property. EVT Execute accounted for 79% of our revenues from third parties in the six months ended June 30, 2021 and 79% and 79% for the years ended December 31, 2020 and 2019, respectively.

 

   

EVT Innovate: includes our internal R&D activities as well as services and partnerships that originate from these R&D activities. In addition to FTE-based revenues, we generate revenues from milestones and royalties on our pipeline assets. EVT Innovate accounted for 21% of our revenues from third parties in the six months ended June 30, 2021 and 21% and 21% for the years ended December 31, 2020 and 2019, respectively.

We leverage our offerings described throughout this prospectus across both EVT Execute and EVT Innovate. Revenue generated through our collaboration arrangements may contribute to either the EVT Execute segment or the EVT Innovate segment, depending on the nature of the contract with our customer, the ownership of the intellectual property, the stage of the project and our right to generate revenue from development success. We believe our partnership model is unique and allows us to balance and diversify the risks associated with drug discovery.

Our Innovation Hub: “Data-driven R&D Autobahn to Cures

We refer to our fully integrated discovery and development platform as our “innovation hub.” Our innovation hub comprises the platforms set forth below, the integration of which we believe allows us to drive rapid progress and successful outcomes throughout the discovery and pre-clinical development phase, creating- a “data-driven R&D Autobahn to Cures.”

 

  1.

EVOiR&D is our R&D platform, which we believe differentiates us from competition as one of the organizations able to deliver fully-integrated drug discovery and development to our partners. EVOiR&D possesses capabilities across the early stages of precision medicine discovery,


 

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  including biomarker selection, human pharmacokinetics (PK) testing, clinical trial planning, safety assessment and manufacturability. EVOiR&D differentiates us from our competition because it combines multimodality expertise, interdisciplinary integration (e.g. chemistry, biology, pharmacology, toxicology, formulation development, API manufacturing, among others) across the various stages of discovery and development and expert coordination of these processes led by highly qualified and experienced scientists.

 

  2.

EVOpanOmics and EVOpanHunter form the foundation of our industrial scale artificial intelligence, machine learning and precision medicine platforms. Our EVOpanOmics platform applies genomics, transcriptomics, proteomics and metabolomics data to profile and select promising new drug candidates based on comprehensive cell biological profiles. EVOpanHunter, our integrated data analytics platform, makes our omics data available in a user friendly manner. Users can freely interact with and combine data in a web-based system where results are available immediately and can be interpreted or used as input for subsequent steps. This rapid feedback is a crucial feature distinguishing EVOpanHunter from other similar tools.

Our artificial intelligence, machine learning and precision medicine platforms are complemented by our proprietary iPSC technology platform, which utilizes patient-derived cell-based assays for disease modelling. iPSC cell assays are crucial to accurately modeling diseases and are increasingly becoming the new gold standard to profile drug candidates in the pre-clinical stage.

 

  3.

EVOaccess is our disruptive and cost-effective approach to discover, develop and commercially manufacture biologic therapeutics. Acquired through our acquisition of Just Biotherapeutics in 2019, our Just—Evotec Biologics platform, EVOaccess, utilizes proprietary artificial intelligence and machine learning capabilities to accelerate the discovery and development of biologic drug candidates and to provide advanced manufacturing process control. Key advantages of EVOaccess include broadening the scope of disease areas for biologic drug candidates driven by significantly higher yields and lower costs, accelerating growth of biosimilars given cost advantages and making orphan diseases more amenable to biologics despite small addressable populations. The ultimate physical representation of this platform is our J.POD® facility. The J.POD® facility is the first of its kind, based on an industry-leading biologics manufacturing technology, with the first facility located in Redmond, Washington which became operational in August 2021. J.POD® has already garnered significant interest from the pharmaceutical industry with partnerships in place with MSD, a Merck & Co. brand, ABL and Ology. In August 2020, the U.S. Department of Defense awarded Just—Evotec Biologics an order for the development of a highly efficient manufacturing process for monoclonal antibodies against COVID-19, followed by a manufacturing agreement in January 2021.

 

  4.

EVOcells is our cell therapy platform based on our proprietary and best-in-class iPSC technology. Our iPSC platform focuses on developing off-the-shelf cell therapies with long-lasting efficacy like immune cells in oncology (e.g. NK, T cells and others), beta cells for diabetes, cardiomyocytes in heart repair, retina cells in ophthalmology as well as iPSC-derived exosomes. Our lead cell therapy candidate is a regenerative therapy for type 1 diabetes that is currently in preclinical development.

 

  5.

EVOgenes is our proprietary gene therapy platform. We have a dedicated gene therapy site located in Austria with a team of experts that covers the full spectrum of services for end-to-end gene therapy development including capsids, regulatory sequences and production cell lines. Our services include the design of state-of-the-art adeno-associated viruses (“AAV”) vectors for a diverse set of therapeutic payloads, the generation of AAV material for research and non-clinical studies, in vitro and in vivo proof of concept studies for target validation including screening drug candidates.


 

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Building Blocks of Data Driven R&D Autobahn to Cures

 

LOGO

We generate revenue through three core collaboration routes:

 

  1.

“Fee-for-service”: We provide stand-alone or fully integrated drug discovery and development solutions to our partners. Our solutions range across all modalities and from early target identification to manufacturing of compounds and commercial products. Well-defined work packages are typically provided and compensated at FTE-rates or on a “fee-for-service” basis, and they are distinct in scope and nature. Typical examples of such services include, among others, high-throughput screening campaigns, ADME-tox tests and API manufacturing. The “fee-for-service model” only applies as long as no intellectual property of Evotec is involved or no essential proprietary technology platforms are used. The resulting therapeutics are therefore protected by the partners’ intellectual property rights.

 

  2.

EVOroyalty: We leverage our proprietary technology platforms to develop new drug discovery projects, assets and platforms, both internally and through collaborations. Such projects allow us to create starting points for the development of strategic partnerships through our EVOroyalty collaboration model with leading pharmaceutical and biotechnology companies and academic institutions. These collaborations are typically based on EVOroyalty agreements with partners, which involve a combination of upfront payments, ongoing research payments, and significant financial upside through milestones and royalties. These collaborations enable the sharing of cost and risk as our partners typically absorb the costs of clinical development and commercialization.

 

  3.

EVOequity: We make equity investments in products, technology platforms and companies through which we obtain early access to innovation. We facilitate the acceleration of innovation by providing capital as well as access to our technology platforms, expertise and network. We see significant potential for value creation from EVOequity over the coming years from new partnerships, clinical successes and positive commercial developments of portfolio companies. We expect to realize returns on investments both from successful exits from our portfolio companies and fee-for-service and FTE-rate based revenues with our portfolio companies. As of June 30, 2021, we had 24 investments with 90 active projects in our EVOequity pipeline.


 

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Our Offering by Platform and Core Collaboration Route

 

LOGO

We have experienced significant growth in the recent past. From 2019 to 2020, our revenues increased by €54.5 million, or 12.2%, from €446.4 million in 2019 to €500.9 million in 2020. In the six months ended June 30, 2021, our revenues grew by €40.3 million, or 17.5%, from €231.0 million to €271.3 million compared to the six months ended June 30, 2020. Our growth is underpinned by an increase in customers to 829 in 2020 as compared to 769 in 2019. We have maintained a repeat business percentage in excess of 90% in the last two years, which we believe affirms the quality of our services and evidences high customer satisfaction. Over this time period, our revenues have become more diversified, with our top 10 customers contributing 41% of total revenues in each of 2020 and the six months ended June 30, 2021 as compared to 46% in 2019. To facilitate future growth, we intend to expand our investments into proprietary “unpartnered” R&D, which drives the development of our pipeline. Unpartnered R&D expenses have risen from €18.3 million in 2015 to €46.4 million in 2020, with a CAGR of 27%. From 2019 to 2020, our unpartnered R&D expenses increased by €8.9 million, or 23.9%, from €37.5 million to €46.4 million. In the six months ended June 30, 2021, our unpartnered R&D expenses grew by €6.2 million, or 28.7%, from €21.6 million for the six months ended June 30, 2020 to €27.8 million.

Our Competitive Strengths

We believe improved success rates in drug discovery have been made more achievable due to the many recent technological advances and new biological insights. We believe we are well-positioned to capitalize on such opportunities, in large part, due to our proprietary drug discovery and development innovation hub which is fully integrated. We believe our platform is one of the most agile platforms in the industry, and we distinguish ourselves from our competition through our competitive strengths, which include:

 

   

the extensive breadth and depth of our fully integrated innovation platform;

 

   

high precision and efficiency rates that exceed industry standards;

 

   

our patient-centric approach which positions us at the forefront of precision medicine;

 

   

our ability to maximize the potential of our integrated technology platform through a modality-agnostic set of solutions;

 

   

our wide array of high-quality partnerships which results in a deep, diversified pipeline; and

 

   

our commitment to scientific excellence which we place at the heart of everything we do.


 

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Our Growth Strategy

Our growth strategy aims to address the entirety of the R&D continuum by tackling the broadest range of disease areas utilizing a modality-agnostic approach. We believe we have built one of the most efficient, integrated drug discovery, development and manufacturing infrastructures, generating high quality results in a fast and cost-efficient way. In addition, by leveraging the extensive capabilities of our platforms and sharing intellectual property through EVOroyalty and EVOequity, we seek to de-risk our portfolio through the breadth and diversity of pipeline assets. Our goal is to have over 170 pipeline assets by the end of 2025, with our first royalties to be received in 2025.

Our strategies include:

 

   

establishing Evotec as a best-in-class, integrated precision medicine platform;

 

   

strengthening our position as a leading service provider to the life sciences sector;

 

   

expanding the breadth of assets within EVOroyalty;

 

   

continuing to disrupt the biologics ecosystem through EVOaccess;

 

   

identifying risk-balanced, high-reward opportunities through EVOequity; and

 

   

leveraging the synergies between our business models.

Summary of Risks Associated with our Business

Our business is subject to a number of risks of which you should be aware before making an investment decision. These risks are discussed more fully in the section of this prospectus titled “Risk Factors” immediately following this prospectus summary. These risks include, but are not limited to, the following:

 

   

Our business is subject to the significant and increasing challenges that face the pharmaceutical and biotechnology industries;

 

   

Our business depends on our and our partners’ success in innovation and drug development, which is highly uncertain;

 

   

Drug discovery and innovation is subject to significant risks and increasing challenges;

 

   

Our operational business faces various performance-related risks;

 

   

We intend to develop and expand our company, and we may encounter difficulties in managing our development and expansion efforts, which could disrupt our operations;

 

   

We may not realize a return on our equity investments;

 

   

Our success depends on our ability to attract and retain senior management and key employees, including highly specialized scientific staff;

 

   

We and our partners face intense competition in the biotechnology and pharmaceutical industries;

 

   

The approval and sale of drug products is subject to extensive regulation, and accordingly our ability to generate revenue from our pipeline assets is uncertain;


 

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Even if any of our pipeline assets are commercialized, they may not be accepted by physicians, healthcare payors, patients or the medical community in general;

 

   

Our efforts to obtain, maintain, protect, defend and/or enforce our intellectual property may be inadequate and our business could be adversely affected as a result;

 

   

Our activities, and the activities of our customers, are and will continue to be subject to extensive government regulation to ensure patient health; and

 

   

We are in the process of engaging a new auditor, the timing of which is uncertain.

Corporate Information

We were incorporated on December 8, 1993 as a company with limited liability (Gesellschaft mit beschränkter Haftung) under the laws of Germany under the name EVOTEC BioSystems GmbH, formerly registered with the commercial register (Handelsregister) of the local court (Amtsgericht) of Hamburg, Germany, under the number HRB 54731. On August 7, 1998, we were converted into a German stock corporation (Aktiengesellschaft) under the laws of Germany under the name EVOTEC BioSystems Aktiengesellschaft, formerly registered with the commercial register (Handelsregister) of the local court (Amtsgericht) of Hamburg, Germany, under the number HRB 68223. On February 28, 2002, we changed our name to Evotec OAI AG, and on June 8, 2005, we changed our name to Evotec AG. On March 29, 2019, we converted into a European stock corporation (Societas Europaea, or SE) under the laws of Germany and the European Union called Evotec SE, registered with the commercial register (Handelsregister) of the local court (Amtsgericht) of Hamburg, Germany, under the number HRB 156381.

Since November 10, 1999, we have been listed on the regulated market of the Frankfurt Stock Exchange under the trading symbol “EVT” and under the ISIN DE0005664809. Our shares are currently listed under the Segment Prime Standard and in the indices MDAX, TecDAX, Prime All Share, LTecDAX, Technology All Share and CDAX.

Our principal executive offices are located at Essener Bogen 7, Hamburg, Germany. Our telephone number is +49 40 560 81-0. Our website address is http://www.evotec.com. The information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus. We have included our website address as an inactive textual reference only.

Implications of Being an Emerging Growth Company and a Foreign Private Issuer

Emerging Growth Company

As a company with less than $1.07 billion in revenue during our last fiscal year, we are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As such, we may take advantage of certain exemptions from various reporting requirements that are applicable to publicly traded entities that are not emerging growth companies. These exemptions include:

 

   

the ability to include only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations disclosure;

 

   

an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002, as amended;


 

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to the extent that we no longer qualify as a foreign private issuer, (i) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and (ii) exemptions from the requirement to hold a non-binding advisory vote on executive compensation, including golden parachute compensation; and

 

   

an exemption from compliance with the requirement that the Public Company Accounting Oversight Board has adopted regarding a supplement to the auditor’s report providing additional information about the audit and the financial statements.

As a result, the information contained in this prospectus may be different from the information you receive from other public companies in which you hold shares.

Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards applicable to public companies This provision allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. This transition period is only applicable under U.S. GAAP. As a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required or permitted by the IASB.

We may take advantage of these provisions for up to five years or until such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company upon the earliest to occur of: (i) the last day of the fiscal year following the fifth anniversary of the date of the completion of this offering; (ii) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (iii) the date on which we have issued more than $1 billion in non-convertible debt securities during the previous three years; (iv) the date on which we are deemed a large accelerated filer under the rules of the SEC, which means the first day of the year following the first year in which, as of the last business day of our most recently completed second fiscal quarter, the market value of our common equity that is held by non-affiliates exceeds $700 million.

Foreign Private Issuer

Upon the completion of this offering, we will report under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as a non-U.S. company with foreign private issuer status. Even after we no longer qualify as an emerging growth company, as long as we continue to qualify as a foreign private issuer under the Exchange Act, we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including:

 

   

the rules under the Exchange Act requiring domestic filers to issue financial statements prepared under U.S. GAAP;

 

   

the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;

 

   

the sections of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and

 

   

the rules under the Exchange Act requiring the filing with the Securities and Exchange Commission, or the SEC, of quarterly reports on Form 10-Q containing unaudited financial statements and other specified information, and current reports on Form 8-K upon the occurrence of specified significant events.


 

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In addition, foreign private issuers are not required to file their annual report on Form 20-F until 120 days after the end of each fiscal year, while U.S. domestic issuers that are accelerated filers are required to file their annual report on Form 10-K within 75 days after the end of each fiscal year. Foreign private issuers are also exempt from the Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information.

We may take advantage of these exemptions until such time as we are no longer a foreign private issuer. We would cease to be a foreign private issuer at such time as more than 50% of our outstanding voting securities are held by U.S. residents and any of the following three circumstances applies: (i) the majority of the Supervisory Board and Management Board members are U.S. citizens or residents, (ii) more than 50% of our assets are located in the United States or (iii) our business is administered principally in the United States.

Foreign private issuers are exempt from certain more robust executive compensation disclosure rules. Thus, even if we no longer qualify as an emerging growth company, but remain a foreign private issuer, we will continue to be exempt from the more robust compensation disclosures required of companies that are neither an emerging growth company nor a foreign private issuer.


 

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THE OFFERING

 

ADSs offered by us

            ADSs, each representing one-half of one ordinary share

 

ADSs to be outstanding immediately following this offering

            ADSs

 

Ordinary shares to be outstanding immediately after the offering

            ordinary shares

 

Option to purchase additional ADSs

We have granted to the underwriters an option, exercisable for a period of 30 days after the date of this prospectus, to purchase an aggregate of up to an additional              ADSs.

 

American Depositary Shares

The underwriters will deliver our ordinary shares in the form of American Depositary Shares, or ADSs. Each ADS, which may be evidenced by an American Depositary Receipt, or ADR, represents one-half of one of our ordinary shares, no par value per share.

 

  As an ADS holder, you will not be treated as one of our shareholders and you will not have shareholder rights. The depositary, JPMorgan Chase Bank, N.A., will be the holder of the ordinary shares underlying the ADSs. You will have the rights of an ADS holder or beneficial owner (as applicable) as provided in the deposit agreement among us, the depositary and holders and beneficial owners of ADSs from time to time. To better understand the terms of the ADSs, see “Description of American Depositary Shares.” We also encourage you to read the deposit agreement, the form of which is filed as an exhibit to the registration statement of which this prospectus forms a part.

 

Depositary

JPMorgan Chase Bank, N.A.

 

Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately $                 million (€                 million) (or approximately $                 million (€                 million) if the underwriters exercise in full their option to purchase additional ADSs), assuming that the number of ADSs offered by us, price per ADS, exchange rate and ratio of shares to ADSs, each as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions.

 

  We currently intend to use the net proceeds from this offering for:

 

   

expanding our biologics manufacturing capacity in the United States;

 

   

building additional J.POD® capacity;


 

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investing in our technology platforms;

 

   

accelerating pipeline activities; and

 

   

expanding our portfolio of equity projects.

 

  We expect to use the remainder of any net proceeds from this offering for general corporate purposes.

 

  See “Use of Proceeds.”

 

Risk factors

See “Risk Factors” beginning on page 14 and the other information contained in this prospectus for a discussion of factors you should consider before deciding to invest in the ADSs.

 

Listing

We have applied to list the ADSs on the Nasdaq Global Select Market under the symbol “EVO.”

Unless otherwise indicated, the number of our ordinary shares to be outstanding after this offering is based on 164,608,236 ordinary shares outstanding as of June 30, 2021.

The number of ordinary shares to be outstanding after this offering excludes:

 

   

             ordinary shares issuable upon the exercise of Share Performance Awards and Restricted Share Awards outstanding as of June 30, 2021; and

 

   

             ordinary shares available for future issuance under our Share Performance Plan and Restricted Share Plan or any future share option plan.

Unless otherwise indicated, all information contained in this prospectus assumes:

 

   

an initial public offering price of $                per ADS, the U.S. dollar equivalent of the closing price of our ordinary shares on the Frankfurt Stock exchange of €                 on                 , 2021, at the exchange rate of $                 per euro, multiplied by the ADS-to-share ratio of 2 to 1; and

 

   

no exercise of the option granted to the underwriters to purchase up to                additional ADSs in this offering.


 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables set forth a summary of our historical consolidated financial data as of and for the years ended December 31, 2020 and 2019 which have been derived from our audited consolidated financial statements for the years ended December 31, 2020 and 2019 included elsewhere in this prospectus. The following tables also set forth a summary of our historical consolidated financial data as of and for the six months ended June 30, 2021 and 2020, which have been derived from the unaudited interim consolidated financial statements for the six months ended June 30, 2021 and 2020 included elsewhere in this prospectus. We present our consolidated financial statements in Euros and in accordance with IFRS as issued by the IASB.

The summary consolidated financial data below should be read together with our consolidated financial statements and related notes, as well as the section of this prospectus titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results for any prior period are not necessarily indicative of results to be expected in any future period.

 

(in € thousands, except share and per share data)   

Six Months
Ended June 30,

   

Year Ended
December 31,

 
  

2021

   

2020

   

2020

   

2019

 
   (unaudited)              

Revenues from contracts with customers

     271,302       230,989       500,924       446,437  

Costs of revenue

     (215,000     (177,924     (375,181     (313,546
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     56,302       53,065       125,743       132,891  
  

 

 

   

 

 

   

 

 

   

 

 

 

Research and development expenses

     (35,434     (29,796     (63,945     (58,432

Selling, general and administrative expenses

     (46,383     (36,532     (77,238     (66,546

Impairment of intangible assets

     (683     —         (3,244     (10,272

Impairment of goodwill

     —         —         —         (1,647

Other operating income

     36,179       35,099       72,175       76,498  

Other operating expenses

     (1,666     (2,919     (4,968     (9,898
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     8,315       18,917       48,523       62,594  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest income and expense, net

     (3,260     (3,376     (7,126     (5,224

Measurement gains from investments

     116,148       —         1,500       80  

Share of the result of associates accounted for using the equity method

     (9,818     (3,644     (10,434     (2,210

Other income from financial assets

     11       37       70       32  

Other expense from financial assets

     —         —         (43     —    

Foreign currency exchange gain (loss), net

     3,089       (272     (6,935     1,220  

Other non-operating income

     21       475       683       234  

Other non-operating expense

     (81     (313     (431     (164
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before tax

     114,425       11,824       25,807       56,562  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     (3,432     (4,427     (12,065     (12,628

Deferred tax expense

     1,724       (138     (7,490     (6,706
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     112,717       7,259       6,252       37,228  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income attributable to non-controlling interests

     —         —         —         (844
  

 

 

   

 

 

   

 

 

   

 

 

 

Income attributable to shareholders of Evotec SE

     112,717       7,259       6,252       38,072  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share (basic)

     0.69       0.05       0.04       0.25  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share (diluted)

     0.69       0.05       0.04       0.25  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table presents our summary consolidated statement of financial position as of June 30, 2021 (i) on an actual basis and (ii) on an as adjusted basis to give effect to the sale of                ADSs representing                ordinary shares by us in the offering at the assumed initial public offering price of $                per ADS, the U.S. dollar equivalent of the closing price of our ordinary shares on the Frankfurt Stock Exchange of €                 on                 , 2021, at the exchange rate of $                 per euro, multiplied by the ADS-to-share ratio of 2 to 1, and after deducting the estimated underwriting discounts and commissions.

 

    

As of June 30, 2021

 
(in € thousands, except share and per share data)   

Actual

    

As
Adjusted(1)

 

Consolidated statements of financial position:

     

Cash, cash equivalents and investments

     449,335                          

Total assets

     1,621,116     

Total liabilities(2)

     768,542     

Total shareholders’ equity

     852,574     

Working capital(3)

     2,429     

 

(1)

Each $1.00 increase (decrease) in the assumed initial public offering price of $            per ADS, would increase (decrease) each of cash, cash equivalents and investments, total assets and total shareholders’ equity by €                million, assuming the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of ADSs we are offering. An increase (decrease) of 1,000,000 in the number of ADSs offered by us would increase (decrease) each of cash, cash equivalents and investments, total assets, and total shareholders’ equity by approximately €                million, assuming no change in the assumed initial public offering price and after deducting the estimated underwriting discounts and commissions.

 

(2)

Includes loans, finance leases, trade accounts payables, provisions, contract liabilities, current and deferred tax, deferred income and other financial and non-financial liabilities.

 

(3)

We define working capital as current assets without cash on hand, bank balances and investments minus current liabilities excluding loan and lease liabilities.


 

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RISK FACTORS

Risks Related to Our Business and Industry

Our business is subject to the significant and increasing challenges that face the pharmaceutical and biotechnology industries, including in particular the necessity of continual innovation and industry costs.

We are an industry-leading drug discovery and development partner for the pharmaceutical and biotechnology industry. Our mission is to discover best and first-in-class medicines for a broad range of difficult to treat diseases in collaboration with our partners. To that end, we have built a comprehensive suite of fully integrated, next generation technology platforms which we believe will transform the way new drugs are discovered. By leveraging the advanced capabilities of our integrated platforms, we are able to provide solutions to our partners that enable significant improvements in the quality of new drugs while accelerating the drug discovery process and reducing the high cost of attrition often associated with traditional drug discovery processes. The industry in which we operate is highly competitive, with many players pursuing similar scientific approaches. If we do not continually offer our partners innovative and cutting-edge solutions and remain at the forefront of precision medicine, our business may be materially and adversely affected.

Moreover, our business operations are subject to challenges as a result of industry pressures. For instance, we expect the industry to continue experiencing pricing pressures due to the persistent trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative changes. The downward pressure on healthcare costs, particularly with regard to prescription drugs, has intensified and our partners are impacted accordingly. As our business is dependent on the continued health and growth of the pharmaceutical and biological industry, should the industry contract due to pricing pressure, our business may be materially and adversely affected.

Our business depends on our and our partners’ success in innovation and drug development, which is highly uncertain.

We seek to serve as a source of innovative drug candidates to potential partners. We are advancing a number of active discovery and early-stage development assets that we intend to license to partners for clinical development and commercialization. Some of our assets are not partnered, and if we cannot find a suitable partner or agree on acceptable terms with a partner, we may not be able to partner, or generate a return on such assets. Furthermore, the amount of our return on our investments in our pipeline assets depends on many factors, such as the degree of innovation and strength of our intellectual property position, as well as on external factors outside of our control.

For example, our ability to generate a return on our investments in our pipeline assets depends, in significant part, on our partners’ research and development priorities. The market environment, demand and competitive landscape for our individual pipeline assets might change significantly over time as certain diseases become more or less prevalent or other treatment options are demonstrated to be more safe and effective or become more readily available, thereby reducing the market opportunities for our pipeline assets in development. As a result, the commercial objectives of our partners with respect to individual assets and the financial proceeds we may receive from partnering individual assets is highly uncertain, subject to factors outside of our control and could deviate significantly from our projections.

Whether we receive milestone and royalty payments is further subject to our partners’ success with clinical trial testing. Clinical testing is expensive, complex and can take many years to complete. Its outcome is inherently uncertain, and we do not drive the development process when our partners enter the clinical trial phase. Our partners may not be able to initiate, may experience delays in, or may have to discontinue clinical trials for a variety of reasons. Our partners also may experience unforeseen events during, or as a result of, any clinical trials that they conduct that could delay or prevent successful development. Such events may include,

 

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among others, failure by the FDA and other regulators or review boards to authorize our partners’ clinical trials or a decision by such parties that requires our partners to suspend or terminate clinical trials, failure to reach favorable terms with prospective trial sites and prospective contract research organizations (“CROs”), and failure to demonstrate safety and efficacy in clinical trials. Our partners may need to conduct additional non-clinical studies or clinical trials or may decide to abandon product development programs altogether.

In addition to the above, our pipeline assets that our partners develop may be associated with other serious adverse events, undesirable side effects or unexpected characteristics. Moreover, if our partners elect, or are required, to delay, suspend or terminate a clinical trial of one of our pipeline assets, the commercial prospects of such pipeline asset may be harmed and our ability to earn milestone and royalty payments may be delayed or eliminated. Any of these occurrences may harm our business, financial condition, result of operations and prospects significantly.

Drug discovery and innovation is subject to significant risks and increasing challenges.

Drug discovery and innovation carries inherent risk and there is no assurance that our strategic partners will successfully develop and commercialize potential drug products. We will only realize significant returns on our pipeline assets if research and development efforts lead to milestone and royalty payments from successful clinical development and commercialization, which may not occur at all or may occur at a level that provides no attractive return on investment.

Drug discovery and development is expensive, time-consuming and subject to high failure rates. At each stage, there is a risk that trials are delayed or need to be terminated due to negative results. Typically, the earlier the stage of a program, the higher the rate of failure. However, the cost of failure tends to increase in the later stages of development. Even if we identify promising compounds for valuable targets, any resulting R&D project could experience delays or even fail, resulting in the loss of our investment and potential milestone and royalty payments, as well as potential reputational damage, loss of future customers or partnership opportunities.

We are required to make important decisions about how to optimize our allocation of resources and there is a risk we will make wrong decisions. For instance, we invest in internal research and development opportunities with the goal of bringing proprietary assets to value inflection points for partnering. Through EVOequity, we may allocate our investments, whether comprising financial resources or scientific expertise, to the development of ultimately unsuccessful projects, or to sub-optimal investments. If we do not make optimal allocation decisions, our results of operations could be materially adversely affected.

We face various performance-related risks.

We face various performance-related risks in our operating business. For example, fluctuating demand and capacity utilization as well as resource allocation among multiple sites can significantly affect our profitability. In addition, we must continually monitor, manage and calibrate these factors. Such constant assessment and adjustment has become increasingly complex as we have acquired additional research sites and extended our offerings.

In addition, we depend on certain individual large customers. Our three largest customers accounted for 30%, 30% and 24% of our total revenues in 2018, 2019 and 2020, respectively. The loss of any of these customers would have a material adverse impact on our results of operations. Furthermore, certain of our service contracts involve scientific or technical delivery risks, which can be mitigated only in part by high-quality project work. Our past success has been built, in part, on customer recognition of the quality of our work and the strength of our brand. It is therefore imperative that we maintain our strong reputation and avoid any negative impact on our brand, which could lead to a loss of customers and a reduced ability to employ the most highly skilled employees. If we do not manage these performance-related risks, our results of operations and financial position could be adversely affected.

 

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We cannot assure investors that we will deliver sufficient return on investment for our partners and customers in respect of results, innovation, speed and costs of research and development. If we fail to retain market acceptance our financial position and results of operations may be adversely affected.

We intend to develop and expand our company, and we may encounter difficulties in managing our development and expansion efforts, which could disrupt our operations.

Currently, we have more than 3,900 employees and, in connection with the growth and advancement of our pipeline, we expect to increase the number of employees and the scope of our operations. To manage our anticipated development and expansion, we must continue to implement and improve our managerial, operational, legal, compliance and financial systems, expand our facilities, and continue to recruit and train additional qualified personnel. Also, our management may need to divert a disproportionate amount of its attention away from its day-to-day activities and devote a substantial amount of time to managing these development activities.

We are actively developing pipeline assets in many therapeutic areas and across a wide range of diseases. We also routinely pursue new service offerings, such as our recent expansion into CRO services including, but not limited to, protocol preparation and review and regulatory preparation and submission. Successfully developing candidates for, and fully understanding the regulatory and manufacturing pathways to, all of these therapeutic areas and diseases requires a significant depth of talent and experience, resources and corporate processes in order to allow simultaneous execution across multiple areas. In case of limited resources, we may not be able to effectively manage this simultaneous execution and the expansion of our operations or recruit and train additional qualified personnel. This may result in weaknesses in our infrastructure, give rise to operational mistakes, legal or regulatory compliance failures, loss of business opportunities, loss of employees and reduced productivity among remaining employees. For example, by expansion into CRO services, we may become liable for acts or omissions made in connection with developing clinical protocols. The physical expansion of our operations may lead to significant costs and may divert financial resources from other projects. If our management is unable to effectively manage our expected development and expansion, our expenses may increase more than expected, our ability to generate or increase our revenue could be reduced and we may not be able to implement our business strategy. Our future financial performance and our ability to compete effectively will depend in part on our ability to effectively manage the future development and expansion of our company.

We may not generate a positive return on our equity investments.

Through EVOequity we have contributed to equity investments through funding and other resources to develop and potentially commercialize assets. We may continue to make similar equity investments in the future. The companies we invest in are either third-party entities or spin-outs, where we act as an operational venture capital provider. Accordingly, we have little control over development, regulatory and commercialization efforts by such companies. As a result, we are exposed both to the risks inherent in drug discovery and development and the execution capabilities of the management teams of our equity investees. We expect to enter into additional equity investments in the future, and our equity investment strategy may pose a number of risks. Such risks include, among others, that the companies we invest in may not perform or prioritize their obligations as expected, including with respect to protection of intellectual property rights, declining to pursue the development and commercialization of any product candidates even if those candidates achieve regulatory approval, opting not to continue or renew development or commercialization of programs based on clinical trial results, changes in focus or available funding, or other external factors. If our equity investments are not successful and do not result in the development and commercialization of new products, our financial position would be adversely affected.

 

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Our success depends on our ability to attract and retain senior management and key employees, including highly specialized scientific staff.

Our ability to compete in the highly competitive biotechnology and pharmaceutical industry depends upon our ability to identify, attract, develop, motivate, adequately compensate and retain highly qualified managerial and scientific personnel. We are highly dependent upon members of our management and qualified scientific personnel to perform research and development work and therefore are exposed to the risk that losing employees may mean the loss of critical knowledge. We may not be able to retain these employees in particular due to the competitive environment in the biotechnology industry. The loss of any of our employees’ services may adversely impact the achievement of our strategic objectives. We currently do not have “key person” insurance on any of our employees.

We also may encounter problems hiring and retaining the experienced scientific, quality-control and manufacturing personnel needed to operate our manufacturing processes and operations, which could result in delays in production or difficulties in maintaining compliance with applicable regulatory requirements. While we will train and qualify all personnel around the appropriate handling of materials, we may not be able to control for or ultimately detect intentional sabotage or negligence by any employee or contractor.

Additionally, from time to time, our employees may be affected by industrial actions or labor disputes, particularly in Europe. To the extent our employees engage in such activities, our operations may be adversely affected.

We and our partners face intense competition in the biotechnology and pharmaceutical industries.

The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. We face the risk that new market entrants and existing competition may try to replicate our business model or introduce a more innovative offering that renders our services less competitive or obsolete. In addition, our drug discovery and development efforts may target diseases and conditions for which there are existing therapies or therapies that are being developed by our competitors, some of which may have greater resources, larger research and development staffs and facilities, more experience in completing target identification, pre-clinical testing, and formulation, as well as greater manufacturing capabilities than we do. Further, any drug products resulting from our research and development efforts might not be able to compete successfully with others’ existing and future products.

The approval and sale of drug products is subject to extensive regulation and accordingly our ability to generate revenue from our assets is uncertain.

Research and development activities, as well as the approval and marketing of a pharmaceutical product, are subject to extensive regulation by the U.S. Food and Drug Administration (the “FDA”) and similar regulatory authorities in other regions. The approval of the relevant authorities is required before a product can be tested in humans and later sold within a given market. The regulatory approval process is intensive, costly for our partners and time-consuming, and the timing of receipt of regulatory approval is difficult to predict. Therefore, even if the clinical development of assets by our partners is successful, regulatory approval may not be received, may be restricted to certain geographical regions or indications or might later be withdrawn or significantly delayed. Any such failure to receive regulatory approval could adversely affect our ability to realize milestone and royalty revenue.

Even if any of our pipeline assets are commercialized, they may not be accepted by physicians, healthcare payors, patients or the medical community in general.

Even if our partners obtain regulatory approval for one of our pipeline assets, the asset may not gain market acceptance or prevalent usage among physicians, healthcare payors, patients and the medical

 

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community, which is critical to commercial success. Market acceptance of any of our pipeline assets depends on a number of factors, including:

 

   

the safety and efficacy as demonstrated in clinical trials;

 

   

the timing of market introduction of the pipeline asset as well as the products of competitors;

 

   

the clinical indications for which the pipeline asset is approved and physician and medical community awareness of and familiarity with such indications;

 

   

the potential and perceived advantages of such pipeline assets over alternative treatments;

 

   

the cost of treatment in relation to alternative treatments, including any similar generic treatments;

 

   

the pricing and the availability of coverage and adequate reimbursement by third-party payors;

 

   

the prevalence and severity of any adverse side effects; and

 

   

the effectiveness of sales and marketing efforts.

If any of our pipeline assets are commercialized, we may not receive the expected revenue as a result of these factors leading to poor market acceptance.

COVID-19, has affected, and any similar pandemic, epidemic or outbreak of an infectious disease may materially and adversely affect, our business, financial condition, results of operations, cash flows and prospects.

The COVID-19 pandemic is continually evolving and to date has led to the implementation of various containment measures, including government imposed shelter-in-place orders, quarantines, national or regional lockdowns, travel restrictions and other public health safety measures, as well as reported adverse impacts on healthcare resources, facilities and providers across the world. In response to the spread of COVID-19, and in accordance with direction from government authorities, we have, for example, limited the number of such personnel that can be present at our facilities at any one time, mandated the usage of face masks in all Evotec facilities, implemented weekly COVID-19 task force consultations, limited the maximum numbers of people allowed in rooms at one time and requested that many of our personnel work remotely. In the event that government authorities were to further modify current restrictions, our employees conducting research and development or manufacturing activities may not be able to access our laboratory or manufacturing facilities and our core activities may be significantly limited or curtailed, possibly for an extended period of time.

As a result of the COVID-19 pandemic, we have experienced and may in the future (with COVID-19 or other similar pandemics and outbreaks) experience severe disruptions, including:

 

   

interruption of or delays in receiving products and supplies, such as pipettes and pipette tips, from the third parties we rely on to, among other things, provide our service offerings to our customers or manufacture for our customers, which may impair our ability to operate our business;

 

   

limitations on our business operations by local, state or federal governments that affect our ability to operate our business;

 

   

delays in customers’ orders and negotiations with customers and potential customers;

 

   

delays in clinical trials conducted by our partners, leading to a decrease in revenue in our EVT Innovate segment due to a corresponding delay in milestone achievements;

 

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business disruptions caused by workplace, laboratory and office closures and an increased reliance on employees working from home, travel limitations, cyber security and data accessibility limits, or communication or mass transit disruptions; and

 

   

limitations on employee resources that would otherwise be focused on the conduct of our activities, including because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people.

Any of these factors could severely affect our operations. These and other factors arising from the COVID-19 pandemic could worsen in countries that are already experiencing significant levels of COVID-19 infections, could continue to spread to additional countries or could return to countries where the pandemic has been partially or previously contained and could further adversely impact our ability to conduct our business generally and have a material adverse impact on our business, financial condition, results of operations, cash flows and prospects.

We cannot predict the scope and severity of any potential business shutdowns or disruptions as a result of the COVID-19 pandemic. The extent to which the pandemic may negatively impact our consolidated operations and results of operations or those of our third-party manufacturers, suppliers, partners or customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence. Such developments include the ultimate geographic spread of the disease, the duration of the pandemic, new variants of the virus that may emerge, the effectiveness, availability and rollout of vaccines, the extent of travel restrictions, additional or modified government actions, new information that may emerge concerning the severity and impact of COVID-19 and actions to contain the pandemic or treat its impact, such as social distancing, quarantines, national or regional lockdowns or business closures. Despite increasing availability of vaccinations in many jurisdictions, it is still possible that a resurgence in communal activity will result in increased cases of COVID-19, which could result in further lockdowns, closures, and interruptions to our operations.

In addition, to the extent the ongoing COVID-19 pandemic adversely affects our business and results of operations, it may also have the effect of exacerbating the impact of the other risks and uncertainties described in this “Risk Factors” section.

The United Kingdom’s withdrawal from the European Union could lead to disruptions to our UK-based operations and the free movement of our personnel which could adversely impact the market price of our ADSs and make it more difficult for us to do business.

The United Kingdom formally exited the European Union (commonly referred to as “Brexit”) on January 31, 2020. In connection with Brexit, the United Kingdom entered into the EU–UK Trade and Cooperation Agreement 2020 on December 30, 2020 and ended its transition period on December 31, 2020. The long-term effects of Brexit will depend on the current and future agreements and arrangements the United Kingdom negotiates with the European Union, including whether and to what extent it will retain access to the European Union markets. For example, following the transition period for introducing EU-UK border controls, which is expected to end in July 2021, we may experience higher administrative costs due to the complexities that may be introduced to our business as a result of Brexit. In addition, we may experience supply chain disruptions as a result of significant delays in the customs clearance and delivery and transit of goods needed to process customer orders. These delays could result in the loss of sales or even the termination of some of our contracts. Uncertainty surrounding customs clearance for goods being shipped into and from the United Kingdom may also impact our distribution and logistics related to our regular shipping of test compounds from our UK sites to our other European sites and to our international customers. We may also experience elevated costs for import and export services. Additionally, we could experience disruptions related to the free movement of persons between the United Kingdom and the EU member states which could affect our employees’ mobility resulting in increased personnel vacancies or the inability to hire and retain qualified employees.

 

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There will be a period of considerable uncertainty particularly in relation to United Kingdom financial and banking markets as well as in relation to the regulatory process in Europe. As a result of this uncertainty, financial markets could experience volatility which could adversely affect the market price of our ADSs. We, along with our partners, may also face new regulatory costs or requirements and challenges that could have a material adverse effect on our operations, including the potential for a delay in our research and development processes and approvals in Europe. Depending on the terms of any future agreements and arrangements negotiated with the European Union, the United Kingdom could lose the benefits of global trade agreements negotiated by the European Union on behalf of its members, which may result in increased trade barriers that could make our doing business worldwide more difficult. In addition, currency exchange rates translated in pound sterling and euro, with respect to each other, and the U.S. dollar have already been adversely affected by Brexit. Any continued foreign exchange fluctuations could cause similar fluctuations in our financial results.

Brexit and ongoing developments in the United Kingdom have created uncertainty with regard to data protection regulation in the United Kingdom and could result in the application of new data privacy and protection laws and standards to our operations in the United Kingdom and our handling of personal data of users located in the United Kingdom. The UK General Data Protection Regulation “GDPR”), effective as of January 1, 2021, and the UK Data Protection Act of 2018 (as amended on January 1, 2021) which supplements the UK GDPR, now apply to our processing of personal data in the United Kingdom and elsewhere, if the processing is of UK residents and certain other conditions are met. The European Commission has adopted an adequacy decision in favor of the United Kingdom, enabling data transfers from EU member states to the United Kingdom without additional safeguards. However, the United Kingdom adequacy decision will automatically expire in June 2025 unless the European Commission renews or extends that decision. In addition, while the United Kingdom data protection regime currently permits data transfers from the United Kingdom to the EU and other third countries covered by a European Commission adequacy decision, and currently includes a framework to permit the continued use of EU standard contractual clauses and binding corporate rules for personal data transfers from the United Kingdom to third countries, this is subject to change in the future, and any such changes could impact our ability to transfer personal data from the United Kingdom to the EU and other third countries. Additionally, Brexit and the subsequent implementation of the UK GDPR will expose us to two parallel data protection regimes, each of which potentially authorizes similar significant fines and other potentially divergent enforcement actions for certain violations.

We are subject to certain foreign export and import controls, sanctions, embargoes, anti-corruption laws, and anti-money laundering laws and regulations. Any violation of such laws and regulations may subject us to criminal liability and other serious consequences.

In connection with our worldwide business operations, we must comply with a broad range of legal and regulatory requirements relating to export controls, economic sanctions, anti-bribery and corruption laws, and anti-money laundering laws.

We are subject to export controls and import laws and regulations in the countries in which we conduct business. We are required to comply with export control restrictions imposed by multiple authorities, including the United Nations, U.S. Export Administration Regulations, U.S. Customs regulations, Council Regulation (EC) 428/2009 (as amended), and German export control laws.

Our entities and personnel are also subject to various economic and trade sanctions regulations, such as economic sanctions administered by the United States (including the U.S. Treasury Department’s Office of Foreign Assets Controls), the European Union, the U.K., Germany, the United Nations or any governmental institutions/agencies of any of the foregoing. These economic sanctions restrict our ability to engage in business dealings with certain countries and persons. Failure to comply with such restrictions could lead to punitive consequences, including reputational damage, which could adversely affect our business and financial condition. In addition, the EU’s, the U.S.’s, and other applicable sanctions and embargo laws and regulations vary in their application: they do not all apply to the same covered persons or prescribe the same activities, and such sanctions and embargo laws and regulations may be amended or strengthened over time.

 

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Our entities and personnel are also subject to various anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977, as amended, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, and other state and national anti-bribery and anti-money laundering laws in the countries in which we conduct activities, including the UK Bribery Act 2010 and the anti-corruption laws of Germany. Anti-corruption laws are interpreted broadly and generally encompass active as well as passive bribery. These laws prohibit companies and their employees (including directors), agents, contractors, and other business partners and intermediaries from directly or indirectly receiving or accepting, or directly or indirectly authorizing, promising, offering, or providing, improper payments or anything else of value, in each case in the public or private sector on a national or international level. We may engage third parties to conduct clinical trials, and/or to obtain necessary permits, licenses, patent registrations, and other regulatory approvals. We have direct or indirect interactions with officials and employees of government agencies or government-affiliated hospitals, universities, and other organizations. Our business relations with health care professionals may be subject to particular legal risks under applicable anti-bribery and corruption laws. We can be held liable for the corrupt or other illegal activities of our employees (including directors), agents, contractors, and other business partners and intermediaries, even if we do not explicitly approve of, authorize or have actual knowledge of such activities.

U.S. public companies are required to maintain records that accurately and fairly represent their transactions and have an adequate system of internal accounting controls. We maintain and continuously improve and develop internal controls, policies, procedures and training to ensure compliance by us and our directors, officers, employees, representatives, consultants, and agents with the FCPA, UK Bribery Act and other applicable anti-corruption laws and make efforts to ensure their effectiveness. However, we can make no assurance that our controls, policies and procedures, even if enhanced, have been or will be followed at all times or effectively detect and prevent all violations of the applicable laws and every instance of fraud, bribery and corruption. In many foreign countries, including countries in which we may conduct business, it may be a local custom that businesses engage in practices that are prohibited by the FCPA, U.K. Bribery Act, or other applicable laws and regulations. Any violations of the laws and regulations described above may result in substantial civil, administrative and criminal fines and penalties, imprisonment, the loss of export or import privileges, debarment, tax reassessments, breach of contract and fraud litigation, reputational harm, and other consequences. In addition, responding to any enforcement action or internal investigation related to alleged misconduct may result in a significant diversion of management’s attention and resources and significant defense costs and other professional fees.

Our future success depends in part on our and our partners’ ability to penetrate global markets, where we would be subject to additional regulatory burdens and other risks and uncertainties associated with international operations.

Our future success depends in part on our ability to operate internationally, which could subject us to risks and uncertainties, including:

 

   

the burden of complying with complex and changing regulatory, tax, accounting, labor and other legal requirements in each jurisdiction that we or our partners pursue;

 

   

reduced protection for intellectual property rights;

 

   

differing medical practices and customs affecting acceptance in the marketplace;

 

   

import or export licensing requirements;

 

   

governmental controls, trade restrictions or changes in tariffs;

 

   

economic weakness, including inflation, or political instability in particular non-U.S. economies and markets;

 

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production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad;

 

   

longer accounts receivable collection times;

 

   

longer lead times for shipping;

 

   

language barriers;

 

   

foreign currency exchange rate fluctuations;

 

   

reimbursement, pricing and insurance regimes; and

 

   

the interpretation of contractual provisions governed by local laws in the event of a contract dispute.

Failure to successfully navigate these risks and uncertainties may limit or prevent market penetration for any products that we or our partners may develop, thereby limiting their commercial potential and our revenues.

We intend to undertake future strategic acquisitions, which may pose a variety of risks that could negatively affect our operating results.

From time to time, we acquire companies, businesses and assets and make investments that complement or augment our existing business, such as our acquisition of Just-Biotherapeutics Inc. in 2019. We intend to undertake additional strategic acquisitions, however we may not realize the intended advantages of such acquisitions and investments, in particular if we are unsuccessful in ascertaining or evaluating target businesses. For instance, our assumptions may prove to be incorrect, which could cause us to fail to realize the anticipated benefits of these transactions. If we fail to realize the expected benefits from acquisitions or investments, whether as a result of unidentified risks or liabilities, integration difficulties, regulatory setbacks, litigation with current or former employees or other events, our business, results of operations and financial condition could be adversely affected (e.g. impairments on goodwill or intangible assets). Moreover, we may not be able to locate suitable acquisition or partnership opportunities.

Following an acquisition, we may not be able to successfully integrate the acquired business or operate the acquired business profitably. Integrating newly acquired businesses can be expensive and time-consuming. In addition, integration efforts often take a significant amount of time, place a significant strain on managerial, operational and financial resources, result in loss of key personnel and can prove to be more difficult or expensive than predicted. The diversion of our management’s attention and any delay or difficulties encountered in connection with any future acquisitions could result in the disruption of our on-going business or inconsistencies in standards and controls that could negatively affect our operations, including our ability to maintain third-party relationships. If we encounter difficulties integrating newly acquired assets or operations with our platform, our business and results of operations as a group may be adversely impacted. Moreover, if we invest in new modalities and technologies, we may not be successful in integrating them into our platform offerings or generating customer or partner demand for them, which could result in failure to generate a return on our investment.

The manufacture of drug products is complex. If we encounter any difficulties in production, the supply of products for clinical trials could be delayed or stopped.

At our various sites throughout Europe, the United Kingdom and the United States, we manufacture drug products for clinical use and may encounter various difficulties in production, particularly in scaling up or out, validating the production process, and assuring high reliability of the manufacturing process. These problems may include delays or breakdowns in logistics and shipping, difficulties with production costs and

 

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yields, difficulties obtaining necessary raw materials on favorable terms or at all, quality control, product testing, operator error, lack of availability of qualified personnel, as well as failure to comply with strictly enforced regulations. We may also experience complications or delays in the construction of our J.POD® facilities, as well as unforeseen manufacturing issues with the J.POD® facilities once operational.

We have limited redundancy among our manufacturing facilities, and if any of our manufacturing facilities experience difficulties, including but not limited to manufacturing, product release, shelf life, testing, storage and supply chain management or shipping, any production may be delayed or suspended until we can resume operations. In order to resolve such difficulties, we may also be required to incur significant expenditures. If we were to encounter any of these difficulties, our ability to satisfy our partners’ requirements could be jeopardized.

Furthermore, if microbial, viral or other contaminations are discovered in our laboratories or manufacturing facilities, such facilities may need to be closed for an extended period of time to investigate and remedy the contamination. We cannot assure you that any of these or other issues relating to our manufacturing operations will not occur in the future. Any delay or interruption in the supply of products for clinical trials could delay the completion of clinical trials and, depending upon the period of delay, require our partners to begin new clinical trials or terminate clinical trials completely, where Evotec may be liable for such additional expenses depending on the relevant services agreement.

Our manufacturing facilities also require certification and validation activities to demonstrate that they operate as designed. In addition, our manufacturing facilities are subject to regulatory inspections by the FDA, the national competent authorities in EU member states (including AIFA in Italy), the Medicines and Healthcare products Regulatory Agency (“MHRA”) in the UK, and other comparable regulatory authorities. If we are unable to reliably manufacture products in accordance with the legal and regulatory requirements of the relevant regulatory authorities, we may not obtain or maintain the necessary approvals. Further, our facilities may fail to pass regulatory inspections, which would cause significant delays and additional costs required to remediate any deficiencies identified by the regulatory authorities. Any of these challenges could delay completion of clinical trials, require bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay regulatory approval, impair commercialization efforts, increase our cost of goods, and have an adverse effect on our business, financial condition, results of operations and growth prospects.

Any failure, unauthorized access, security breaches, loss of data and other disruptions to our information technology systems could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability.

We collect and maintain information in digital form that is necessary to conduct our business, particularly for purposes of our EVOpanOmics, EVOpanHunter, J.DESIGN and our iPSC-based drug discovery platforms, and we are highly dependent on our information technology systems. In the ordinary course of our business, we collect, store, and transmit large amounts of confidential information, including intellectual property, proprietary business information, human samples, personal information, and data to comply with current Good Manufacturing Practice (“GMP”), similar foreign requirements and data integrity requirements. We have also outsourced elements of our information technology infrastructure, and as a result a number of third-party vendors may or could have access to confidential information. Despite the implementation of security measures and safeguards, our information technology systems and data and those of our current or future contractors and consultants are vulnerable to compromise or damage.

Our internal computer systems and those of our current and any future partners, vendors, and other contractors or consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, cybersecurity threats, war, and telecommunication and electrical failures. Furthermore, because the techniques used to obtain unauthorized access to, or to sabotage, systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or

 

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implement adequate preventative measures. We may also experience security breaches that remain undetected for an extended period of time. If any such material system failure, accident or security breach were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs and our business operations, whether due to a loss of our trade secrets or other proprietary information or other similar disruptions. Any such breach, loss or compromise of clinical trial participant personal data, including in connection with EVOpanHunter, may also subject us to civil fines and penalties, including under the GDPR, the law of the relevant country in the EEA (“EEA Member State”), the UK GDPR and applicable state and federal data privacy laws in the United States. To the extent that any disruption or security breach were to result in a loss of, or damage to, data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur internal costs or liability, our competitive position could be harmed and the further development and commercialization of our partners’ product candidates could be delayed.

Although we take measures to protect sensitive data from unauthorized access, use or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers or viruses or breached due to employee error, malfeasance or other malicious or inadvertent disruptions. Any such breach or interruption could compromise our networks and the information stored there could be accessed by unauthorized parties, manipulated, publicly disclosed, lost or stolen. Any such access, breach or other loss of information could result in legal claims or proceedings, and liability under federal, state or foreign laws that protect the privacy of personal information, as well as regulatory penalties. In the United States and elsewhere, notice of certain breaches must be made to affected individuals and governmental agencies, including U.S. state Attorneys General. Similarly, breach reporting obligations vis-à-vis affected individuals and data protection authorities exist under the GDPR and UK GDPR. Such a notice could harm our reputation and our ability to compete in our industry. Further, U.S. state Attorneys General are authorized to bring civil actions seeking either injunctions or damages in response to violations that threaten the privacy of state residents; affected individuals in the EEA or UK may bring similar claims in civil actions.

Unauthorized access, loss or dissemination could also damage our reputation or disrupt our operations, including our ability to conduct our analyses, deliver test results, process claims and appeals, provide customer assistance, conduct research and development activities, collect, process and prepare company financial information, provide information about our tests and other patient and physician education and outreach efforts through our website, and manage the administrative aspects of our business.

Though we have put systems and procedures in place to minimize the likelihood of security breaches, accidents or system failures occurring; we cannot guarantee that third parties will not be able to gain unauthorized access to or otherwise breach our systems in the future. Any such unauthorized access or breach could adversely affect our business, results of operations and financial condition.

Risks Related to our Financial Condition and Capital Requirements

Our operating results may fluctuate significantly from one financial period to the next, which makes our future operating results difficult to predict. If our operating results fall below expectations, the price of the ADSs could decline.

Our financial condition and operating results have varied in the past and will continue to fluctuate from one financial period to the next due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations include changes in revenue and expenditures, external events and the business environment, and include, but are not limited to:

 

   

the progress of preclinical development, laboratory testing and clinical trials of our pipeline assets;

 

   

our ability to develop competitive technologies, services and products;

 

   

our ability to manage our organic and inorganic growth;

 

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changes in market conditions in the pharmaceutical and biotechnological sector;

 

   

risks associated with the international aspects of our business;

 

   

changes in regulations of the FDA, European and foreign regulators or other international regulatory actions;

 

   

a decline in the value of the Euro could reduce the value of your investment in Evotec’s ADSs;

 

   

our ability to obtain additional capital that may be necessary to expand our business;

 

   

our partners’ ability to obtain additional capital that may be necessary to develop and commercialize projects;

 

   

our ability to receive and the frequency of milestone and royalty payments, which may fluctuate over time and may be delayed;

 

   

the frequency and success of mergers and acquisitions;

 

   

decline of the long-term values of Evotec’s assets, which could lead to fair value adjustments or impairment charges that could reduce Evotec’s earnings;

 

   

increased net loss participations in our associates (accounted for using the equity method) as well as fair value adjustments that could reduce our earnings; and

 

   

our ability to claim our tax loss carryforwards or research and development tax credits.

Due to the various factors mentioned above, and others, the profits we generate may fluctuate significantly from one reporting period to the next, such that a period-to-period comparison of our results of operations may not be a good indication of our future performance.

In any particular period, our operating results could be different from the expectations of securities analysts or investors, which could cause the price of the ADSs to decline. While we intend to periodically report on the status of our collaborative pipeline assets, we may not always be able to provide forward-looking guidance on the timing of those next steps. In addition, we do not control the timing of disclosures of any achievements related to any of our programs that are managed by our partners. Any disclosure that may be perceived as negative, whether or not such data is related to other data that we or others release, may have a material adverse impact on the price of the ADSs.

We expect to continue to incur significant expenses for the foreseeable future in connection with our business activities.

For the six months ended June 30, 2021 and 2020, we generated gross profits of €56.3 million and €53.1 million, respectively.

Since our inception in 1993, we have devoted most of our financial resources to research and development, including preclinical development activities and the development of our platforms and we expect to continue to incur significant expenses and costs of revenue for the foreseeable future.

We anticipate that our expenses will increase substantially if:

 

   

we continue to invest to identify novel technologies and increase the number and type of offerings;

 

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we continue to add internal manufacturing capacity or capability;

 

   

we continue to be subject to significant environmental, health and safety regulations, compliance with which is costly;

 

   

we add additional infrastructure to our quality control, quality assurance, legal, compliance and other groups to support our operations and overall growth of the company;

 

   

we attract and retain skilled personnel;

 

   

we expand the business through construction of new facilities requiring additional time and capital expenditures;

 

   

interest rates on our borrowings increase;

 

   

we maintain, protect, defend, enforce and expand our intellectual property portfolio; and

 

   

we become subject to increased taxes, interest, or penalties due to any adverse resolutions (e.g. changes in laws or regulations) or any tax audits or challenges by tax authorities.

Any such increase in expenses could have a material adverse effect on our financial condition and results of operations.

We will require substantial additional financing to achieve our goals, and a failure to obtain this capital on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our development programs, commercialization efforts or other operations.

As of June 30, 2021, we had €449.3 million in cash, cash equivalents and investments. We estimate that the net proceeds from this offering will be approximately $                million, after deducting the estimated underwriting discounts and commissions. However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings, government or other third-party funding, sales of assets, marketing and distribution arrangements, other partnerships and licensing arrangements, or a combination of these approaches. Even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital if market conditions are favorable or if we have specific strategic considerations. Our spending will vary based on new and ongoing development and corporate activities.

To the extent that we raise additional capital through the sale of ADSs, ordinary shares or securities convertible or exchangeable into ordinary shares, your ownership interest will be diluted.

Our ability to take advantage of R&D tax credits and tax loss carryforwards may be limited.

The amount of and our ability to claim tax loss carryforwards and research and development credits may be subject to limitations and uncertainty.

R&D tax credits derived in various countries, where we run parts of our operations, form a substantial part of our other operating income and contribute positively to our financial performance. Overall, it depends on the political framework in the respective countries whether, how and to what extent we are allowed to claim R&D tax credits. Historically, the R&D tax credit policies in the countries where we operate were generally very stable and were even expanding in the recent years. However, in Italy, the legal requirements changed in 2020, leading to a significant reduction in other operating income. In case of a national or international economic crisis (e.g. due to the COVID-19 pandemic), changes in regional economic policies or other circumstances beyond our

 

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control, there is a higher risk that tax relief will be reduced or eliminated in the short-term and permanently due to legislative changes. A full or partial expiration of these programs or change in the eligibility criteria could negatively impact our financial performance. We monitor the political and legislative landscape on a regular basis in this regard.

In Germany, we have unused tax loss carryforwards for corporate taxes, though we have not recognized deferred tax assets related to such loss carryforwards for IFRS reporting purposes. In general, net operating loss, or NOL, carryforwards in Germany do not expire. They are, however, subject to review and possible adjustment by the German tax authorities. Furthermore, under current German tax laws, certain substantial changes in the Company’s ownership (in particular a transfer of more than 50% of the shares or voting rights to a single acquirer, including parties related to the acquirer, within a five-year period) and our business may further limit the amount of NOL carryforwards that can be used annually to offset future taxable income. In addition, we currently have net operating loss carryforwards for U.S. federal income tax purposes, some of which may expire unused.

In addition, our ability to use certain U.S. net operating losses to offset future U.S. taxable income may become further limited as a result of an “ownership change” (as a result of the offering contemplated hereby or otherwise), and these net operating losses could expire or otherwise be unavailable. As of December 31, 2020, the Company had $128 million of net operating losses for U.S. federal income tax purposes. Under the U.S. Internal Revenue Code of 1986, as amended, (the “Code”), transfers or issuances of our equity may impair or reduce the ability of the Company to utilize U.S. federal net operating loss carryforwards and certain other tax attributes in the future. Section 382 of the Code contains rules that limit the ability of a company that undergoes an “ownership change” to utilize its net operating loss and tax credit carry forwards and certain built-in losses recognized in years after the ownership change. An “ownership change” is generally defined as an increase in ownership of a corporation’s stock by more than 50 percentage points over a rolling three-year period by stockholders that own (directly, indirectly or constructively) 5% or more of the stock of a corporation at any time during the relevant rolling three-year period. If an ownership change occurs, Section 382 imposes an annual limitation on the use of pre-ownership change net operating losses, credits and certain other tax attributes to offset taxable income earned after the ownership change. The annual limitation is generally equal to the product of the applicable long-term tax exempt rate in effect for the month in which the ownership change occurs and the value of the company’s stock immediately before the ownership change (subject to some adjustments). For example, this annual limitation may be adjusted to reflect any unused annual limitation for prior years and certain recognized (or treated as recognized) built-in gains and losses for the year. In addition, Section 383 generally limits the amount of tax liability in any post-ownership change year that can be reduced by pre-ownership change tax credit carryforwards or capital loss carryforwards. Some of our net operating losses are subject to existing limitations. Following the offering contemplated hereby, our existing net operating losses may be subject to further limitations and we may not be able to fully use these net operating losses to offset future taxable income. No assurance can be given that prior transactions have not resulted in an ownership change for purposes of Section 382 of the Code or that future transactions will not result in an additional ownership change. Even if the offering contemplated hereby or a subsequent transaction does not result in an ownership change, it may materially increase the likelihood that we will undergo an ownership change in the future. Sales of our common shares by stockholders, whose interests may differ from our interests, may increase the likelihood that we or one of our subsidiaries undergoes an ownership change. If we or our subsidiaries have or were to undergo an ownership change, it could result in increased future tax liability to us. There is also a risk that, due to regulatory changes or for other unforeseen reasons, existing net operating losses could expire or otherwise be unavailable to offset future income tax liabilities.

There is a risk that we may not be able to utilize a material portion of our NOLs or credits in the countries in which we operate. In addition, the rules regarding the timing of revenue and expense recognition for tax purposes in connection with various transactions are complex and uncertain in many respects, and our recognition or utilization of any tax attributes could be subject to challenge by taxing authorities. In addition, the validity of our tax attributes could be challenged by taxing authorities. In the event any such challenge is

 

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sustained, our NOLs could be materially reduced or we could be determined to be a material cash taxpayer for one or more years. Furthermore, our ability to use our NOLs or credits is generally conditioned upon our attaining profitability and generating taxable income. We do not know whether or when we will generate the taxable income necessary to utilize our NOL or credit carryforwards.

Currency exchange rate fluctuations may materially affect our results of operations and financial condition.

Fluctuations in exchange rates, particularly between the U.S. dollar, the pound sterling and the euro may adversely affect our operations due to the international nature of our business. We manage this exposure via close market monitoring, forwards, natural hedges and other selective hedging instruments. Hedging transactions are entered into for future transactions that can be reliably anticipated based on our order book. Despite active currency management, exchange rate risk cannot be eliminated due to unpredictable volatility. As a result, our business and the price of our ADSs and ordinary shares may be affected by fluctuations in foreign exchange rates, which may have a significant impact on our results of operations and cash flows from period to period. Currency exchange movements also impact our reported liquidity in respect of translating liquid assets held in U.S. dollars or pound sterling into Euros.

Future acquisitions or equity investments may increase our capital requirements, dilute our shareholders, cause us to incur debt or assume contingent liabilities, and subject us to other risks. We may not realize any benefits from these acquisitions or equity investments.

From time to time, we may evaluate various acquisitions and equity investments including licensing or acquiring complementary products, intellectual property rights, technologies or businesses. Any potential acquisition or equity investment may entail numerous risks, including but not limited to:

 

   

increased operating expenses and cash requirements;

 

   

assumption of indebtedness or contingent liabilities;

 

   

assimilation of operations, intellectual property and products of an acquired company;

 

   

difficulties associated with integrating new personnel;

 

   

diversion of our management’s attention from our existing operations in pursuing such a strategic merger or acquisition;

 

   

retention or loss of key employees and uncertainties in our ability to maintain key business relationships;

 

   

unexpected liability claims or costs;

 

   

the potential loss of key personnel;

 

   

our inability to generate revenue or expected synergies from acquired technology or products sufficient to meet our objectives in undertaking the acquisition or even to offset the associated acquisition and maintenance costs; and

 

   

our inability to cost-effectively integrate acquired technologies or products with our existing business.

Some of the businesses we may seek to acquire may be marginally profitable or unprofitable. For these businesses to achieve acceptable levels of profitability, we may need to improve their management, operations,

 

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products and/or market penetration. We may not be successful in this regard, and we may encounter other difficulties in integrating acquired businesses into our existing operations. Further, if we undertake acquisitions, we may utilize our cash, issue dilutive securities, assume or incur debt obligations, incur large one-time expenses and acquire intangible assets that could result in significant future amortization expense.

Further, as part of our EVOequity model, from time to time we invest in start-up companies and/or development stage technology. In evaluating these opportunities, we follow an evaluation process that considers factors such as potential financial returns, new expertise in emerging drug discovery and business benefits. Despite our best efforts to calculate potential return and risk, some or all of these companies we invest in may be unprofitable at the time of, and subsequent to, our investment. We may incur losses from these investments, including the potential for future impairment charges on the investments, and the anticipated benefits of the technology and business relationships may be less than expected.

Tax laws obligate us to withhold a percentage of license payments we make to third party licensors of intellectual property rights and remit those withholdings to the applicable tax authorities, and late withholding tax payments may subject us to penalties and fees.

Under German tax laws, and the tax laws of various jurisdictions in which we operate, we are obligated to withhold a percentage of license payments we make to third parties in consideration of the grant of rights under their intellectual property, and remit those withholdings to the relevant tax authorities.

In some cases, it may be possible to seek an exemption from or the refund of certain withholding taxes from tax authorities, including the German Federal Tax Office, after filing exemptions or refund applications, and we intend to cooperate with the applicable licensor of the intellectual property in doing so if such licensor seeks to obtain any such exemption or refund where appropriate. There is a possibility, however, that the relevant claims against the licensors for a reimbursement of withholding taxes and/or the authority for a refund of withholding taxes, may in some instances, not be enforceable as a result of a licensor no longer existing, the lapse of time or any other facts preventing the enforcement of such claims.

Risks Related to our Reliance on Third Parties

If we are not able to establish partnerships on commercially reasonable terms, we may have to alter our research, development and commercialization plans.

We face significant competition in establishing relationships with appropriate partners. Whether we reach a definitive agreement for a partnership will depend upon, among other things, our assessment of the partner’s resources and expertise, the terms and conditions of the proposed partnership and the proposed partner’s evaluation of a number of factors. Those factors may include, among other things, and as applicable for the type of potential product or technology, an assessment of the opportunities and risks of our technology, the design or results of studies or trials, the likelihood of approval, if necessary, of the FDA or similar regulatory authorities outside the United States, the potential market for the subject product candidate, the costs and complexities of manufacturing and delivering such product candidate to partners, the potential of competing products and technologies and industry and market conditions generally.

Current or future partners may also consider alternative product candidates or technologies for similar indications that may be available to collaborate on and whether such a partnership could be more attractive than the one with us. Additionally, we may be restricted under existing partnership agreements from entering into future agreements on certain terms or for certain development activities with potential partners. Similarly, our partnership agreements have in the past and may in the future contain non-competition provisions that could limit our ability to enter into partnerships with future partners.

Partnerships are complex and time-consuming to negotiate and document. We may not be able to negotiate partnerships on a timely basis, on acceptable terms, or at all. If we do enter into additional partnership

 

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agreements, the negotiated terms may force us to relinquish rights that diminish our potential profitability from development and commercialization of the subject product candidates or others. If we are unable to enter into additional partnership agreements, we may have to curtail the research and development of the product candidate or technology for which we are seeking to collaborate, reduce or delay research and development programs, delay potential commercialization timelines, reduce the scope of any sales or marketing activities or undertake research, development or commercialization activities at our own expense. If we elect to increase our expenditures to fund research, development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all.

We seek to create value through partnerships. According to these partnership arrangements, our partners lead the clinical development of assets that we have ushered through the drug discovery and pre-clinical development phases. However, we may not obtain the value that we anticipate from these partnerships, as we are dependent on our partners’ ability to, for example, successfully execute clinical development, regulatory approval and commercialization. In the event of our partners’ failure, milestones, royalties and license revenues may be lower than expected or not achieved at all. In addition, our results may vary significantly due to fluctuating milestone revenues and changes in fair value of our equity investments. For example, we did not receive certain milestone payments that we had expected in 2020 as a result of delays in clinical trial starts and enrollment due to the COVID-19 pandemic. To date, none of our assets have received marketing authorization, and there can be no assurance that our partners will successfully develop and market our pipeline assets in the future.

We rely on third parties to manufacture and provide certain aspects of our products and service offerings.

We depend on certain third parties to provide us with products and services critical to our business. Such third parties include, among others, suppliers of drugs, suppliers of kits for use in our laboratories, suppliers of reagents for use in our testing equipment and providers of maintenance services for our equipment. The failure of any of these third parties to adequately provide the required products or services, or to comply with applicable regulatory requirements, could have a material adverse effect on our business.

Risks Related to Intellectual Property

Our efforts to obtain, maintain, protect, defend and/or enforce our intellectual property may be inadequate and our business could be adversely affected as a result.

Our success depends in part on our ability to develop, use and protect our proprietary methodologies, software, compositions, processes, procedures, systems, technologies and other intellectual property. To protect our intellectual property position, we primarily rely upon trade secrets, confidentiality agreements and policies, invention assignments and other contractual arrangements, trademark registrations and copyrights. Although our patent portfolio is not material to certain of our business as a whole, we have filed patent applications in the United States, Europe and abroad related to our pipeline assets, processes or other technologies (including methods of manufacture). Our collaboration partners also file patent applications on their development assets on which we may earn milestones and royalties. We may not be able to apply for patents on certain aspects of our current or future pipeline assets, processes or other technologies and their uses in a timely fashion or at a reasonable cost.

Even issued patents may later be found invalid or unenforceable or may be modified or revoked in proceedings before various patent offices or in courts in the United States, Europe or other jurisdictions. The degree of future protection for our intellectual property and other proprietary rights is uncertain. Only limited protection may be available and may not adequately protect our rights or permit us to gain or keep any competitive advantage. Additionally, our intellectual property may not provide us with sufficient rights to exclude others from copying our processes and technologies or commercializing pipeline assets. If we do not adequately obtain, maintain, protect, defend and/or enforce our intellectual property and proprietary technology, competitors may be able to use our proprietary technologies and erode or negate any competitive advantage we may have, which could have a material adverse effect on our financial condition and results of operations.

 

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The patent application process is subject to numerous risks and uncertainties, and there can be no assurance that we or any of our current or future licensors or partners will be successful in prosecuting, obtaining, protecting, maintaining, enforcing and/or defending patents and patent applications necessary or useful to protect our proprietary technologies (including pipeline assets and methods of manufacture) and their uses. These risks and uncertainties include, from time to time, the following:

 

   

the United States Patent and Trademark Office (the “USPTO”), the German Patent and Trademark Office (“DPMA”), the European Patent Office (“EPO”) and various other governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process, the noncompliance with which can result in abandonment or lapse of a patent or patent application or a finding that a patent is unenforceable, and partial or complete loss of patent rights in the relevant jurisdiction;

 

   

patent applications may not result in any patents being issued;

 

   

issued patents that we own (solely or jointly) or have in-licensed may be challenged, invalidated, modified, revoked, circumvented, found to be unenforceable or otherwise may not provide any competitive advantage;

 

   

our competitors may seek or may have already obtained patents that will limit, interfere with or eliminate our ability to make, use, sell, import or otherwise exploit our pipelines assets, processes or other technologies;

 

   

other parties may have designed around our patent claims or developed technologies that may be related or competitive to our pipeline assets, processes or other technologies, may have filed or may file patent applications and may have received or may receive patents that overlap or conflict with our patent filings, either by claiming the same or overlapping methods, reagents or devices or by claiming subject matter that could dominate one or more of our patent claims;

 

   

any successful opposition or challenge to any patents owned (solely or jointly) by or in-licensed to us could deprive us of rights necessary for the development and exploitation of our pipeline assets, processes and other technologies or the successful commercialization of any pipeline assets, processes and other technologies that we may develop;

 

   

because patent applications in the United States and most other jurisdictions are confidential for a period of time after filing, we cannot be certain that we, our co-owners or our licensors were the first to file any patent application related to our pipeline assets, processes or other technologies and their uses;

 

   

a court or patent office proceeding, such as a derivative action or interference, can be provoked or instituted by a third party or a patent office, and might determine that one or more of the inventions described in our patent filings, or in those we licensed, was first invented by someone else, so that we may lose rights to such invention(s);

 

   

a court or other patent proceeding, such as an inter partes review, post grant review or opposition, can be instituted by a third party to challenge the inventorship, scope, validity and/or enforceability of our patent claims and might result in invalidation or revision of one or more of our patent claims, or in a determination that such claims are unenforceable;

 

   

there may be significant pressure on the U.S. government and international governmental bodies to limit the scope of patent protection both inside and outside the United States for disease treatments that prove successful, as a matter of public policy regarding worldwide health concerns; and

 

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countries other than the United States may have patent laws less favorable to patentees than those upheld by U.S. courts, allowing competitors a better opportunity to create, develop and market competing product candidates, processes and other technologies.

The patent position of pharmaceutical and biotechnology companies generally is highly uncertain, involves complex legal and factual questions, and has been the subject of much litigation in recent years. The standards that the USPTO, DPMA, EPO and their counterparts use to grant patents are not always applied predictably or uniformly and can change. Similarly, the ultimate degree of protection that will be afforded to inventions, including ours, in the United States and other countries, remains uncertain and is dependent upon the scope of the protection decided upon by patent offices, courts and lawmakers. Moreover, there are periodic changes in patent law, as well as discussions in the Congress of the United States and in international jurisdictions about modifying various aspects of patent law and such changes in patent laws or in interpretations of patent laws may diminish the value of our intellectual property. There is no uniform, worldwide policy regarding the subject matter and scope of claims granted or allowable in pharmaceutical or biotechnology patents. As a result, the issuance, scope, validity, enforceability, and commercial value of our patent rights are highly uncertain. In certain countries, for example, methods for the medical treatment of humans are not patentable. More generally, the laws of some countries do not protect intellectual property rights to the same extent as U.S. laws, and those countries may lack adequate rules and procedures for granting, maintaining, protecting, defending and/or enforcing our intellectual property rights.

Furthermore, the patent prosecution process is also expensive and time-consuming, and we may not be able to file, prosecute, maintain, protect, defend, enforce or license all necessary or desirable patents or patent applications, as applicable, at a reasonable cost or in a timely manner or in all potentially relevant jurisdictions. It is possible that defects of form in the preparation or filing of our patents or patent applications may exist, or may arise in the future, for example with respect to proper priority claims, inventorship, claim scope, or requests for patent term adjustments. It is also possible that we will fail to identify patentable aspects of our research and development output in time to obtain patent protection. If we delay filing a patent application, and a competitor files a patent application on the same or similar invention before we do, our ability to secure patent rights may be limited and we may not be able to patent the invention at all. Even if we can patent the invention, we may be able to patent only a limited scope of the invention, and the limited scope may be inadequate to protect our assets and technologies, or to block competitor’s products and technologies that are similar or adjacent to ours. Our earliest patent filings have been published. A competitor may review our published patent filings and arrive at the same or similar technology advances for our assets as we developed. If the competitor files a patent application on such an advance before we do, then we may no longer be able to protect that aspect of our assets and technologies and we may require a license from the competitor, which may not be available on commercially viable terms or at all. Moreover, we may not develop additional proprietary products, methods and technologies that are patentable. We may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the rights to patents licensed from or to third parties. Therefore, these patents and applications may not be prosecuted and enforced by such third parties in a manner consistent with the best interests of our business. We also rely to a certain extent on trade secrets, know-how, and technology, which are not protected by patents, to maintain our competitive position. If any trade secret, know-how or other technology not protected by a patent were to be disclosed to or independently developed by a competitor, our business and financial condition could be materially adversely affected.

Our ability to enforce our owned (solely or jointly) and in-licensed patent and other intellectual property rights depends on our ability to detect infringement, misappropriation and other violation of such patents and other intellectual property. It may be difficult to detect infringers, misappropriators and other violators who do not advertise the components or methods that are used in connection with their products and services. Moreover, it may be difficult or impossible to obtain evidence of infringement, misappropriation or other violation in a competitor’s or potential competitor’s product or service, and in some cases we may not be able to introduce obtained evidence into a proceeding or otherwise utilize it to successfully demonstrate infringement. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded if we were to prevail may not be commercially meaningful.

 

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In addition, proceedings to enforce or defend our owned (solely or jointly) or in-licensed patents could put our patents at risk of being invalidated, held unenforceable or interpreted narrowly. Such proceedings could also provoke third parties to assert claims against us, including that some or all of the claims in one or more of our patents are invalid or otherwise unenforceable. Such challenges may result in loss of patent rights, loss of exclusivity, or in patent claims being narrowed, invalidated or held unenforceable, which could limit our ability to stop others from using or commercializing similar or identical product candidates, processes or other technologies or limit the duration of the patent protection of our pipeline assets, processes or other technologies. If any of our owned (solely or jointly) or in-licensed patents covering our pipeline assets, processes or other technologies are narrowed, invalidated or found unenforceable, or if a court found that valid, enforceable patents held by third parties covered one or more of our pipeline assets, processes or other technologies, our competitive position could be harmed or we could be required to incur significant expenses to protect, enforce or defend our rights. If we initiate lawsuits to protect, defend or enforce our patents, or litigate against third-party claims, such proceedings would be expensive and would divert the attention of our management and technical personnel, even if the eventual outcome is favorable to us.

The degree of future protection for our intellectual property and other proprietary rights is uncertain, and we cannot ensure that:

 

   

any of our patents, or any of our pending patent applications, if issued, or those of our licensors, will include claims having a scope sufficient to protect our pipeline assets, processes and other technologies;

 

   

any of our pending patent applications or those of our licensors may issue as patents;

 

   

others will not or may not be able to make, use, offer to sell or sell product candidates, processes or other technologies that are the same as or similar to our own but that are not covered by the claims of the patents that we own (solely or jointly) or license;

 

   

we were the first to make the inventions covered by each of the patents and pending patent applications that we own (solely or jointly) or license;

 

   

we, our co-owners or our licensors were the first to file patent applications for these inventions;

 

   

others will not develop similar or alternative product candidates, processes or other technologies that do not infringe the patents we own (solely or jointly) or license;

 

   

any of the patents we own (solely or jointly) or license will be found to ultimately be valid and enforceable;

 

   

any patents issued to us or our licensors will provide a basis for an exclusive market for our commercially viable pipeline assets, processes or other technologies or will provide us with any competitive advantages;

 

   

a third party may not challenge the patents we own (solely or jointly) or license and, if challenged, a court would hold that such patents are valid, enforceable and infringed;

 

   

the patents of others will not have an adverse effect on our business;

 

   

our competitors do not conduct research and development activities in countries where we do not have enforceable patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets;

 

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we will develop additional pipeline assets, processes or other technologies that are separately patentable; or

 

   

our development and commercialization activities, including our pipeline assets, processes or other technologies will not infringe upon the patents of our competitors or any other third parties, including any non-practicing entities or patent assertion entities.

Further, while software and other of our proprietary works may be protected under copyright law, we have chosen not to register any copyrights in these works, and instead, we primarily rely on protecting our software as unregistered copyright (in jurisdictions where such protection is available) or trade secret. In order to bring a copyright infringement lawsuit in the United States, the copyright must be registered. Accordingly, the remedies and damages available to us for unauthorized use of our software may be limited.

We or our partners may not be successful in obtaining, maintaining, protecting or defending the necessary intellectual property rights to allow us to identify and develop pipeline assets, processes or other technologies.

We currently have rights to certain intellectual property, through our owned (solely or jointly) and in-licensed patents and other intellectual property rights, relating to identification and development of our pipeline assets, processes or other technologies. Our pipeline assets, processes or other technologies could require the use of intellectual property and other proprietary rights held by third parties and their success could depend in part on our ability to acquire, in-license or use such intellectual property and proprietary rights. In addition, our pipeline assets may require specific formulations to work effectively and efficiently and these intellectual property and other proprietary rights may be held by others. We may be unable to secure such licenses or otherwise acquire or in-license any compositions, methods of use, processes or other third-party intellectual property rights from third parties that we identify as necessary or consider attractive, on reasonable terms, or at all, for pipeline assets, processes and other technologies that we may develop. The licensing and acquisition of third-party intellectual property rights is a competitive area, and a number of more established companies are also pursuing strategies to license or acquire third-party intellectual property rights that we, or our partners, may consider attractive or necessary. These established companies may have a competitive advantage over us due to their size, cash resources, and greater clinical development and commercialization capabilities.

In some circumstances where we grant licenses to or collaborate with our partners who retain ownership of their intellectual property, we may not have the right to control the preparation, filing, prosecution, maintenance, enforcement and defense of patents and patent applications covering the technology. Therefore, we cannot be certain that these patents and patent applications will be prepared, filed, prosecuted, maintained, protected, enforced or defended in a manner consistent with the best interests of our business. Any patents or patent applications that we in-license may be challenged, narrowed, circumvented, invalidated or held unenforceable, or our licensors or partners may not properly maintain such patents or patent applications and they may expire. If we, our licensees or partners fail to obtain, maintain, defend, protect or enforce the intellectual property we license to them, or our partners license to us, we could lose our rights to the intellectual property and our competitors could market competing products using the inventions in such intellectual property. In the event we breach any of our obligations related to our licenses, we may incur significant liability to our partners. Any of the foregoing could have a material adverse effect on our competitive position, business, financial conditions, results of operations and prospects.

We sometimes collaborate with academic institutions in certain aspects of our preclinical research or development. Typically, these institutions provide us with an option to negotiate a license to certain of the institution’s rights in technology resulting from such collaboration. However, these institutions may not honor our option for intellectual property rights or we may otherwise be unable to negotiate a license within the specified time frame or under terms that are acceptable to us. If we are unable to do so, the institution may offer the intellectual property rights to other parties, potentially blocking our ability to pursue our program or otherwise continue to develop certain pipeline assets, processes or other technologies.

 

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If our trademarks and trade names are not adequately protected, we may not be able to build or maintain name recognition in our markets of interest and our business, financial condition, results of operations, cash flows and prospects may be adversely affected.

Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented or declared generic, lapsed or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names or may be forced to stop using these names or marks which we need for name recognition by potential partners or customers in our markets of interest. Third parties have filed, and may in the future file, for registration of trademarks similar or identical to our trademarks, thereby impeding our or developing common law rights in such trademark or any other trademarks that are similar or identical to our trademarks, and if we are not successful in challenging such rights and defending against challenges to our trademarks, we may not be able to use such trademarks to develop brand recognition of our technologies, products or services. Additionally, any trademarks we try to register may be rejected. Even if we successfully register trademarks, opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. Further, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. Also, we have and may in the future enter into agreements with owners of such third party trade names or trademarks to avoid potential trademark litigation which may limit our ability to use our trade names or trademarks in certain fields of business. We may also in the future license our trademarks and trade names to third parties, such as distributors. Though these license agreements may provide guidelines for how our trademarks and trade names may be used, a breach of these agreements or misuse of our trademarks and tradenames by our licensees may jeopardize our rights in or diminish the goodwill associated with our trademarks and trade names.

Over the long term, if we are unable to establish or maintain name recognition based on our trademarks and trade names, we may not be able to compete effectively in our markets of interest and our business, financial condition, results of operations, cash flows and prospects may be adversely affected. In addition, our efforts to enforce or protect our proprietary rights related to trademarks and trade names may be ineffective and could result in substantial costs and diversion of resources and could adversely affect our business, financial condition, results of operations and prospects.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance fees, renewal fees, annuity fees, and various other fees on patents and applications will be due to be paid to various patent agencies in several stages over the lifetime of the patents or applications. We employ and rely on third parties, including outside counsel to pay these fees for us; however, we cannot guarantee that payment of these fees will be on time. The USPTO and various non-U.S. governmental patent agencies (such as the DPMA and EPO) require compliance with a number of procedural, documentary, fee payment, and other similar provisions during the patent application process. We employ reputable law firms and other professionals to help keep us in compliance, and in many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. We are also dependent on our licensors to take the necessary action to comply with these requirements with respect to our in-licensed intellectual property, and we cannot guarantee that they will do so. In such an event, our competitors might be able to enter the market with similar or identical product candidates, processes or other technologies, and this would have a material adverse impact on our business, financial condition, results of operations and prospects.

 

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We depend in part on out-licensing and partnership arrangements for late-stage development, marketing and commercialization of our pipeline assets.

We depend in part on out-licensing arrangements for late-stage development, marketing and commercialization of our pipeline assets. Dependence on out-licensing arrangements subjects us to a number of risks, including the risk that:

 

   

we have limited control over the amount and timing of resources that our licensees devote to pipeline assets;

 

   

our licensees may experience financial difficulties;

 

   

our licensees may fail to secure adequate commercial supplies of pipeline assets upon marketing approval, if at all;

 

   

our future revenues depend heavily on the efforts of our licensees;

 

   

business combinations or significant changes in a licensee’s business strategy may adversely affect the licensee’s willingness or ability to complete the development, marketing and/or commercialization of the relevant pipeline assets; and

 

   

a licensee could move forward with a competing product candidate developed either independently or in partnership with others, including our competitors.

If we or any of our licensees breach or terminate their agreements with us, or if any of our licensees otherwise fail to conduct their development and commercialization activities in a timely manner or there is a dispute about their obligations, we may need to seek other licensees, or we may have to develop our own internal sales and marketing capability for our pipeline assets. Our dependence on our licensees’ experience and the rights of our licensees will limit our flexibility in considering alternative out- licensing arrangements for our pipeline assets. Any failure to successfully develop these arrangements or failure by our licensees to successfully develop or commercialize any of our pipeline assets in a competitive and timely manner, will have a material adverse effect on the commercialization of our pipeline assets.

Any of our issued patents covering our assets could be narrowed, found invalid or unenforceable if challenged in court or before administrative bodies in the United States or abroad, including the USPTO, DPMA and EPO

Our owned (solely or jointly) and licensed patents and patent applications may be subject to validity, enforceability and priority disputes. The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability. Some of our patents or patent applications (including licensed patents and patent applications) may be challenged at a future point in time in opposition, derivation, reexamination, inter partes review, post-grant review or interference or other similar proceedings. Any successful third-party challenge to our or our licensors’ patents in this or any other proceeding could result in the unenforceability or invalidity of such patents, which may lead to increased competition to our business, which could have a material adverse effect on our business, financial condition, results of operations and prospects. In addition, if we or our licensors initiate legal proceedings against a third party to enforce a patent covering our assets, the defendant could counterclaim that such patent covering our assets, as applicable, is invalid and/or unenforceable. In patent litigation in the United States and various non-U.S. jurisdictions, defendant counterclaims alleging invalidity or unenforceability are commonplace. There are numerous grounds upon which a third party can assert invalidity or unenforceability of a patent. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld

 

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relevant information from the relevant patent office, or made a misleading statement, during prosecution. A litigant or the USPTO itself could challenge our patents on this basis even if we believe that we have conducted our patent prosecution in accordance with the duty of candor and in good faith. The outcome following such a challenge is unpredictable. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include ex parte re-examination, inter partes review, post-grant review and derivation proceedings in the United States, and equivalent proceedings in non-U.S. jurisdictions, such as opposition proceedings. Such proceedings could result in revocation of or amendment to our or our licensors’ patents in such a way that they no longer cover and protect our assets. With respect to the validity of our or our licensors’ patents, for example, we cannot be certain that there is no invalidating prior art of which we, our licensors, our or their respective patent counsel and the patent examiner were unaware during prosecution. The outcome following legal assertions of invalidity and unenforceability during patent litigation is unpredictable. If a defendant or other third party were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of the patent protection on certain aspects of our assets and technologies, which could have a material adverse effect on our business, financial condition, results of operations and prospects. In addition, if the breadth or strength of protection provided by our patents and patent applications is threatened, regardless of the outcome, it could dissuade companies from collaborating with us to license intellectual property, or develop or commercialize current or future products.

We may not be aware of all third-party intellectual property rights potentially relating to our assets. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until approximately 18 months after filing or, in some cases, not until such patent applications issue as patents. We might not have been the first to make the inventions covered by each of our pending patent applications and we might not have been the first to file patent applications for these inventions. To determine the priority of these inventions, we may have to participate in interference proceedings, derivation proceedings or other post-grant proceedings declared by the USPTO, or other similar proceedings in non-U.S. jurisdictions (e.g. within the jurisdiction of the DPMA or EPO), that could result in substantial cost to us and the loss of valuable patent protection. The outcome of such proceedings is uncertain. No assurance can be given that other patent applications will not have priority over our patent applications. In addition, changes to the patent laws of the United States allow for various post-grant opposition proceedings that have not been extensively tested, and their outcome is therefore uncertain. Furthermore, if third parties bring these proceedings against our patents, regardless of the merit of such proceedings and regardless of whether we are successful, we could experience significant costs and our management may be distracted. Any of the foregoing events could have a material adverse effect on our business, financial condition, results of operations and prospects.

Third parties, ranging from our competitors to non-practicing entities or patent assertion entities, may assert that we are employing their intellectual property and other proprietary technology without authorization, or we may become involved in lawsuits to protect or enforce our intellectual property, any of which could be expensive, time-consuming and unsuccessful.

Our commercial success depends in part on our ability and the ability of future partners to develop, manufacture, market and sell our assets and use our assets and technologies without infringing, misappropriating or otherwise violating the intellectual property rights of third parties. There is a substantial amount of litigation involving patents and other intellectual property rights in the biotechnology industry, as well as administrative proceedings for challenging patents, including interference, derivation, inter partes review, post-grant review, and re-examination proceedings before the USPTO, or oppositions and other comparable proceedings in foreign jurisdictions. We may be exposed to, or threatened with, future litigation by third parties having patent or other intellectual property rights alleging that our assets, manufacturing methods, software and/or technologies infringe, misappropriate or otherwise violate their intellectual property rights.

Numerous issued patents and pending patent applications that are owned by third parties exist in the fields in which we are developing our assets and technologies. It is not always clear to industry participants,

 

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including us, the claim scope that may issue from pending patent applications owned by third parties or which patents cover various types of products, technologies or their methods of use or manufacture. Thus, because of the large number of patents issued and patent applications filed in our fields, it is difficult to conclusively assess our freedom to operate without infringing on third party rights and there may be a risk that third parties, including our competitors, may allege they have patent rights encompassing our assets, technologies or methods and that we are employing their proprietary technology without authorization. We cannot guarantee that any of our patent searches or analyses, including the identification of relevant patents, the scope of patent claims or the expiration of relevant patents, are complete or thorough, nor can we be certain that we have identified each and every third-party patent and pending application in the United States and abroad that is relevant to or necessary for the commercialization of our assets, processes, platforms and other technologies in any jurisdiction. The scope of a patent claim is determined by an interpretation of the law, the written disclosure in a patent and the patent’s prosecution history. Our interpretation of the relevance or the scope of a patent or a pending application may be incorrect. For example, we may incorrectly determine that our assets are not covered by a third-party patent or may incorrectly predict whether a third-party’s pending application will issue with claims of relevant scope. Our determination of the expiration date of any patent in the United States or abroad that we consider relevant may be incorrect. Our failure to identify and correctly interpret relevant patents may negatively impact our ability to develop and market our assets, processes, platforms and other technologies.

There may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture or methods for treatment related to our processes, technology, and the use, development, manufacture or commercialization of our pipeline assets. As patent applications can take many years to issue, there may be currently pending patent applications, which may later result in issued patents that our processes, technology or pipeline assets may infringe. In addition, third parties may obtain patents in the future and claim that our processes, technology or pipeline assets infringe upon these patents. If third parties, including our competitors, believe that our pipeline assets or technologies infringe, misappropriate or otherwise violate their intellectual property, such third parties may seek to enforce their intellectual property, including patents, by filing an intellectual property-related lawsuit, including patent infringement lawsuit, against us. Even if we believe third-party intellectual property claims are without merit, there is no assurance that a court would find in our favor on questions of infringement, validity, enforceability, or priority.

If any of these third parties were to assert these patents against us and we are unable to successfully defend against any such assertion, we may be required, including by court order, to cease the development and commercialization of the infringing products or technology and we may be required to redesign such products and technologies so they do not infringe such patents, which may not be possible or may require substantial monetary expenditures and time. For instance, if any third-party patents were held by a court of competent jurisdiction to cover the manufacturing process of any of our pipeline assets, any molecules formed during the manufacturing process or any final product itself, the holders of any such patents may obtain injunctive or other equitable relief, which could effectively block our ability to develop and commercialize such pipeline asset unless we obtained a license under the applicable patents, or until such patents expire. Similarly, if any third-party patents were held by a court of competent jurisdiction to cover aspects of our formulations, processes for manufacture or methods of use, including combination therapy, the holders of any such patents may be able to block our ability to develop and commercialize the applicable pipeline asset unless we obtained a license or until such patent expires. In either case, such a license may not be available on commercially reasonable terms, or at all, or may be non-exclusive.

Also, we may choose to challenge, including in connection with any allegation of patent infringement by a third party, the patentability, validity or enforceability of any third-party patent that we believe may have applicability in our field, and any other third-party patent that may be asserted against us. Such challenges may be brought either in court or by requesting that the USPTO, DPMA, EPO, or other foreign patent offices review the patent claims, such as in an ex parte re-examination, inter partes review, post-grant review proceeding or opposition proceeding. However, there can be no assurance that any such challenge by us or any third party will be successful. Even if such proceedings are successful, these proceedings are expensive and may consume our

 

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time or other resources, distract our management and technical personnel. There can be no assurance that our defenses of non-infringement, invalidity or unenforceability will succeed.

Third parties, including our competitors, could be infringing, misappropriating or otherwise violating our owned (solely or jointly) and in-licensed intellectual property rights. Monitoring unauthorized use of our intellectual property is difficult and costly. We may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. From time to time, we seek to analyze our competitors’ products and services, and may in the future seek to enforce our rights against potential infringement, misappropriation or violation of our intellectual property. However, the steps we have taken to protect our intellectual property rights may not be adequate to enforce our rights as against such infringement, misappropriation or violation of our intellectual property. Any inability to meaningfully enforce our intellectual property rights could harm our ability to compete and reduce demand for our assets and technologies. Litigation proceedings may be necessary for us to enforce our patent and other intellectual property rights. In any such proceedings, a court may refuse to stop the other party from using the technology at issue on the grounds that our owned (solely or jointly) and in-licensed patents do not cover the technology in question. Further, in such proceedings, the defendant could counterclaim that our intellectual property is invalid or unenforceable and the court may agree, in which case we could lose valuable intellectual property rights, which could allow third parties to commercialize technology or products similar to ours and compete directly with us, without payment to us, or could require us to obtain license rights from the prevailing party in order to be able to manufacture or commercialize our assets without infringing such party’s intellectual property rights, and if we are unable to obtain such a license, we may be required to cease commercialization of our assets and technologies, any of which could have a material adverse effect on our business, financial condition, results of operations and prospects. The outcome in any such proceedings are unpredictable.

Even if resolved in our favor, litigation or other legal proceedings relating to our intellectual property rights, regardless of whether we are defending against or asserting any intellectual property-related proceeding, may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Any of the foregoing, or any uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could compromise our ability to compete in the marketplace, including our ability to raise the funds necessary to continue our operations. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar adverse effect on our business, financial condition, results of operations and prospects.

We may be subject to claims challenging the inventorship of our patents and other intellectual property.

We may be subject to claims that former employees, partners or other third parties have an interest in our patents or other intellectual property as an inventor or co-inventor. The failure to name the proper inventors on a patent application can result in the patents issuing thereon being unenforceable. Inventorship disputes may arise from conflicting views regarding the contributions of different individuals named as inventors, the effects of foreign laws where foreign nationals are involved in the development of the subject matter of the patent, conflicting obligations of third parties involved in developing our pipeline assets or as a result of questions regarding co-ownership of potential joint inventions. Litigation may be necessary to resolve these and other claims challenging inventorship and/or ownership. Alternatively, or additionally, we may enter into agreements to clarify the scope of our rights in such intellectual property. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

 

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Our licensors may have relied on third-party consultants or partners or on funds from third parties, such as the U.S. government, such that our licensors are not the sole and exclusive owners of the patents we in-licensed. If other third parties have ownership rights or other rights to our in-licensed patents, they may be able to license such patents to our competitors, and our competitors could market competing products and technology. This could have a material adverse effect on our competitive position, business, financial conditions, results of operations, and prospects.

In addition, we generally require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements to assign or assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own. The assignment of intellectual property rights may not be self-executing, or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property. Such claims could have a material adverse effect on our business, financial condition, results of operations, and prospects.

Further, the laws of some other countries do not protect intellectual property and other proprietary rights or establish ownership of inventions to the same extent or in the same manner as the laws of the United States. Our employees work in Germany, the United Kingdom, France, Italy, Austria and the United States and are subject to the employment laws of each respective country. For example, ideas, developments, discoveries and inventions made by employees in Germany are subject to the provisions of the German Act on Employees’ Inventions (Gesetz über Arbeitnehmererfindungen), which regulates the ownership of, and compensation for, inventions made by employees. We face the risk that disputes can occur between us and our employees or former employees pertaining to alleged non-adherence to the provisions of this act that may be costly to defend and take up our management’s time and efforts whether we prevail or fail in any such dispute. There is a risk that the compensation we provided to employees who assign patents to us may be deemed to be insufficient and we may be required under German law, or any corresponding laws in other countries, to increase the compensation due to such employees for the use of the patents. In those cases where employees’ rights have not been assigned to us, we may need to pay compensation for the use of those patents. If we are required to pay additional compensation or face other disputes under the German Act on Employees’ Inventions (Gesetz über Arbeitnehmererfindungen) or any corresponding laws in other jurisdictions, our business, results of operations and financial condition could be adversely affected.

In the event of a successful claim of infringement, misappropriation or other violation against us, we may have to pay substantial damages.

In the event of a successful claim of infringement, misappropriation or other violation against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, pay royalties, redesign our infringing products, or obtain one or more licenses from third parties, which may not be made available on commercially favorable terms, if at all, or may require substantial time and expense. Even if such license were available, it may require substantial payments or cross-licenses under our intellectual property rights, and it may only be available on a non-exclusive basis, in which case third parties, including our competitors, could use the same licensed intellectual property to compete with us.

In addition, in connection with certain license, partnership, and other agreements, we have agreed to indemnify certain third parties for certain costs incurred in connection with litigation relating to intellectual property rights or the subject matter of the agreements. The claims may require us to initiate or defend protracted and costly litigation on behalf of licensees and other parties regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages on behalf of those parties or may be required to obtain licenses for the products they use. The cost to us of any litigation or other proceeding relating to intellectual property rights or the subject matter of the agreements, even if resolved in our favor, could be substantial.

 

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Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments in any litigation or other intellectual property proceedings. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of the ADSs.

Changes in patent law in the United States or in other countries could diminish the value of patents in general, thereby impairing our ability to protect our pipeline assets, processes or other technologies.

As is the case with other biotechnology companies, our success is heavily dependent on our intellectual property rights, particularly patents that we own (solely or jointly) and in-license. Obtaining and enforcing patents in the biotechnology industry involve both technological and legal complexity, and therefore obtaining and enforcing biotechnology patents is costly, time-consuming and inherently uncertain. Moreover, there are periodic changes in patent law. For example, after March 2013, under the Leahy-Smith America Invents Act, or the America Invents Act, the United States transitioned to a first inventor to file system in which, assuming that other requirements for patentability are met, the first inventor to file a patent application became entitled to the patent on an invention regardless of whether a third party was the first to invent the claimed invention. Since patent applications in the United States and most other countries are confidential for a period of time after filing or until issuance, we cannot be certain that we or our licensors were the first to either file any patent application related to our assets and other proprietary technologies we may develop or invent any of the inventions claimed in our or our licensor’s patents or patent applications. Even where we have a valid and enforceable patent, we may not be able to exclude others from practicing the claimed invention where the other party can show that they used the invention in commerce before our filing date or the other party benefits from a compulsory license.

The America Invents Act also included a number of significant changes that affected both patent prosecution and litigation. These changes include allowing third-party submission of prior art to the USPTO during patent prosecution and additional procedures to challenge the validity of a patent by USPTO administered post-grant proceedings, including post-grant review, inter partes review and derivation proceedings. Further, because of a lower evidentiary standard in these USPTO post-grant proceedings compared to the evidentiary standard in United States federal courts necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action. The America Invents Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, financial condition, results of operations and prospects.

In addition, recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts and the USPTO, and their equivalents in other jurisdictions, the laws and regulations governing patents could change in unpredictable ways that could have a material adverse effect on our existing patent portfolio and our ability to obtain, maintain, protect, defend or enforce our intellectual property in the future.

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position could be harmed.

In addition to seeking patent protection for our pipeline assets, processes or other technologies we also rely on trade secret protection and confidentiality agreements to maintain our competitive position and protect

 

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proprietary know-how that is not patentable, processes for which patents are difficult to enforce and any other elements of our asset discovery and development processes that involve proprietary know-how, information or technology that is not covered by patents. Certain elements of our assets and technologies, including components of our software and processes for manufacturing, may involve proprietary know-how, information or technology that is not covered by patents, and as such, we may consider trade secrets and know-how to be our primary intellectual property with respect to such aspects of our assets and technologies. However, trade secrets and know-how may be difficult to protect. In particular, we anticipate that with respect to our technologies, these trade secrets and know-how may over time be disseminated within the industry through independent development, the publication of journal articles describing the methodology, and the movement of personnel from academic to industry scientific positions.

We seek to protect these trade secrets, know-how and other proprietary technology, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate partners, academic institutions, outside scientific partners, CROs, contract manufacturers, consultants, advisors, potential acquisition candidates and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants and require all of our employees and key consultants who have access to our trade secrets, proprietary know-how, information or technology to enter into confidentiality agreements. We cannot guarantee that we have entered into such agreements with each party that may have or have had access to our trade secrets or proprietary technology and processes. Despite our best efforts, any of these parties may breach the agreements and we cannot be certain that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access (such as through cybersecurity breach) to our trade secrets or independently develop substantially equivalent information and techniques. For example, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such unauthorized disclosure, which could adversely impact our ability to establish or maintain a competitive advantage in the market.

Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret or know-how is difficult, expensive and time-consuming, distractive to our personnel and the outcome is unpredictable. In addition, some courts both inside and outside the United States are less willing or unwilling to protect trade secrets and know-how. We may need to share our proprietary information, including trade secrets, with future business partners, partners, contractors and others located in countries at heightened risk of theft of trade secrets, including through direct intrusion by private parties or foreign actors, and those affiliated with or controlled by state actors. We also seek to preserve the integrity and confidentiality of our confidential proprietary information by maintaining physical security of our premises and physical and electronic security of our information technology systems, but it is possible that these security measures could be breached and we may not have adequate remedies for such breach.

If any of our trade secrets or know-how were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them from using that technology or information to compete with us. If we are unable to prevent unauthorized material disclosure of our intellectual property to third parties, we will not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, operating results, financial condition and prospects.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information or alleged trade secrets of third parties or competitors or are in breach of non-competition or non-solicitation agreements with our competitors or their former employers.

We have employed and expect to employ individuals who were previously employed at universities or other companies, including our competitors or potential competitors. Although we try to ensure that our

 

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employees, consultants, advisors and independent contractors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that our employees, advisors, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information of their former employers or other third parties, or to claims that we have improperly used or obtained such trade secrets. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel and face increased competition to our business. Any such litigation or the threat thereof may adversely affect our ability to hire employees or contract with advisors, contractors and consultants. A loss of key research personnel work product could hamper or prevent our ability to commercialize potential products, which could harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. This type of litigation or proceeding could substantially increase our operating losses and reduce our resources available for development activities. Some of our competitors may be able to sustain the costs of this type of litigation or proceedings more effectively than we can because of their substantially greater financial resources.

We will not seek to protect our intellectual property rights in all jurisdictions throughout the world, and we may not be able to adequately enforce our intellectual property rights even in the jurisdictions where we seek protection.

Filing, prosecuting and defending patents on pipeline assets, processes or other technologies in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some countries do not protect intellectual property rights to the same extent as laws in the United States or Europe. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States or Europe, or from selling or importing products made using our inventions in and to the United States or other jurisdictions. Competitors and other third parties may use our technologies in jurisdictions where we have not obtained patent protection to develop their own pipeline assets and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States or Europe. These products may compete with our pipeline assets in jurisdictions where we do not have any issued patents, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement, misappropriation or other violation of our patents and other intellectual property or development, marketing and commercialization of competing product candidates, processes or other technologies in violation of our intellectual property and other proprietary rights generally. The legal systems in certain countries may also favor state-sponsored or companies headquartered in particular jurisdictions over our first-in-time patents and other intellectual property protection. The absence of harmonized intellectual property protection laws and effective enforcement makes it difficult to ensure consistent respect for patent, trade secret, and other intellectual property rights on a worldwide basis. As a result, it is possible that we will not be able to enforce our rights against third parties that misappropriate our proprietary technology in those countries.

The lifespans of our patents may not be sufficient to effectively protect our or our partners’ assets, technologies and business.

Patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after its first effective non-provisional filing date, assuming maintenance fees are timely paid after the patent has issued. Most international jurisdictions also provide a 20-year nominal patent term, though many require payment of regular, often annual, annuities to maintain pendency of an application or viability of an

 

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issued patent. In some jurisdictions, one or more options for extension of a patent term may be available, but even with such extensions, the lifespan of a patent, and the protection it affords, is limited. Even if patents covering our or our partners’ assets, processes and other technologies and their uses are obtained, once the patent term has expired, we may be subject to competition from third parties that can then use the inventions included in such patents to create competing products and technologies. In addition, although upon issuance in the United States a patent’s lifespan can be increased based on certain delays caused by the USPTO, this increase can be reduced or eliminated based on certain delays caused by the patent applicant during patent prosecution. Given the amount of time required for the development, testing and regulatory review of new pipeline assets, patents protecting such pipeline assets might expire before or shortly after such pipeline assets are commercialized. If any patents that we own (solely or jointly) or in-license expire, we would not be able to stop others from using or commercializing similar or identical technology and products, and our competitors could market competing products, processes and other technologies. Any of the foregoing could have a material adverse effect on our competitive position, business, financial conditions, results of operations and prospects.

If we or our partners do not obtain patent term extension and data exclusivity for any assets we or our partners may develop, our business may be materially harmed.

Depending upon the timing, duration and specifics of any FDA marketing approval of any pipeline assets we may develop, one or more of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Action of 1984 (the “Hatch-Waxman Amendments”). The Hatch-Waxman Amendments permit a patent extension term of up to five years as compensation for patent term lost during the FDA regulatory review process. A patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval, only one patent may be extended and only those claims covering the approved drug, a method for using it, or a method for manufacturing it may be extended. However, we or our partners may not be granted an extension because of, for example, failing to exercise due diligence during the testing phase or regulatory review process, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents, or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain patent term extension or the term of any such extension is less than we request, our competitors may obtain approval of competing products following our patent expiration, and our business, financial condition, results of operations and prospects could be materially harmed.

We utilize third-party open source software components, and failure to comply with the terms of the underlying open source software licenses could restrict our ability to commercialize our technology and require us to provide third parties access to our proprietary software.

We utilize software licensed by third parties under open source software licenses. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source software licensors generally do not provide support, warranties, indemnification or other contractual protections regarding infringement claims or the quality of the code. Some open source software licenses contain requirements that the licensee make its source code publicly available if the licensee creates modifications or derivative works using the open source software, depending on the type of open source software the licensee uses and how the licensee uses it. If we combine our proprietary technology with open source software in a certain manner, we could, under certain open source software licenses, be required to release the source code of our proprietary technology to the public for free. This would allow our competitors and other third parties to create similar copies of our platform with less development effort and time and ultimately could result in a loss of our services and revenue, which could have a material adverse effect on our business, financial condition, results of operations and prospects. Alternatively, to avoid the public release of the affected portions of our source code, we could be required to expend substantial time and resources to re-engineer some or all of our software. In addition, some companies that use third-party open source software have faced claims challenging their use of such open source software and their compliance with the terms of the applicable open source license. We may face claims from third parties claiming ownership of what we believe to be open source software, or claiming

 

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non-compliance with the applicable open source licensing terms, including claims that demand release of source code for the open source software, derivative works or our proprietary source code that was developed using, or that is distributed with, such open source software. These claims could also result in litigation and could require us to make our proprietary technology source code freely available, devote additional research and development resources to re-engineer our technology, seek costly licenses from third parties or otherwise incur additional costs and expenses, any of which could result in reputational harm and would have a negative effect on our business and operating results. Use of open source software may also present additional security risks because the public availability of such software may make it easier for hackers and other third parties to compromise or attempt to compromise our platform.

Although we review our use of open source software to avoid subjecting our proprietary technology to conditions we do not intend, the terms of many open source software licenses have not been interpreted by courts in the United States, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our proprietary technology. Moreover, we cannot assure investors that our processes for monitoring and controlling our use of open source software in our technology will be effective. If we are held to have breached the terms of an open source software license, we could be subject to damages, required to seek licenses from third parties to continue offering or using our technology on terms that are not economically feasible, to re-engineer our technology, to discontinue the access to our platform if re-engineering could not be accomplished on a timely basis, or to make generally available, in source code form, our proprietary source code, any of which could adversely affect our business, financial condition, results of operations and prospects.

Intellectual property rights do not necessarily address all potential threats to our competitive advantage.

The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. For example:

 

   

others may be able to make product candidates that are similar to any pipeline assets we may develop and commercialize or utilize similar technologies that are not covered by the claims of the patents that we now or may in the future own (solely or jointly) or have exclusively in-licensed;

 

   

we, our co-owners or our licensors, licensees or future partners might not have been the first to make the inventions covered by the issued patents or pending patent applications that we own (solely or jointly) or have exclusively in-licensed;

 

   

we, our co-owners or our licensors, licensees or future partners might not have been the first to file patent applications covering certain of our or their inventions;

 

   

others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our owned (solely or jointly) or in-licensed intellectual property rights;

 

   

it is possible that our pending patent applications or those that we may own (solely or jointly) or in-license in the future will not lead to issued patents;

 

   

issued patents that we own (solely or jointly) or have exclusively in-licensed may be held invalid or unenforceable, including as a result of legal challenges by our competitors;

 

   

our competitors might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets;

 

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we may not develop additional proprietary technologies that are patentable;

 

   

the patents of others may have an adverse effect on our business; and

 

   

we may choose not to file a patent in order to maintain certain trade secrets or know-how, and a third party may subsequently file a patent covering such intellectual property.

Should any of these events occur, they could have a material adverse effect on our business, financial condition, results of operations and prospects.

Risks Related to Regulation and Legal Compliance Matters

Our activities, and the activities of our customers, are and will continue to be subject to extensive government regulation to ensure patient health.

We are subject to various local, state, federal, international and transnational laws and regulations, and, in the future, any changes to such laws and regulations could adversely affect us.

We and our pharmaceutical and biotechnology customers and partners are subject to extensive regulations by the FDA and similar regulatory authorities in other countries for development, manufacturing and commercializing products for therapeutic or diagnostic use. Such regulations include but are not limited to, restrictions on testing on animals and humans, manufacturing, safety, efficacy, labeling, sale, advertising promotion and distribution of our or our partners’ products. In addition, new laws and regulations to which we and our customers and partners are subject may change in the future affecting the viability of market entry for new products developed in our EVT Innovate segment or the ability to continue certain projects in our EVT Execute segment that may consequently be terminated at an early stage.

Parts of our operations are subject to GMP, Good Laboratory Practice (“GLP”) and Good Clinical Practice (“GCP”) requirements and similar foreign requirements. Regulatory authorities and our customers may conduct scheduled or unscheduled (for cause) periodic inspections of our facilities to monitor our quality control system and verify that it complies with regulatory requirements and with the terms of our quality agreements with our customers. Audit findings that are classified as “critical” may lead to a loss of certification with regulatory agencies or a loss of approved supplier status with our customers and a subsequent loss in revenue.

In addition, compliance failures could expose us to contractual or product liability claims, contractual claims from our customers or partners, including claims for reimbursement for lost or damaged active pharmaceutical ingredients, as well as ongoing remediation and increased compliance costs, any or all of which could be significant.

Moreover, any determination that any negligence or non-compliance with applicable laws and regulations resulted in harm to the health of the patient subject to the clinical trial or to whom the commercial drug is administered, could result in criminal, civil and administrative penalties.

We are also subject to a variety of local, state, federal, international and transnational laws and regulations that govern, among other things, (i) the importation and exportation of products (including human biological materials), (ii) the handling, transportation and manufacture of substances that could be classified as hazardous or controlled drugs, and (iii) our business practices in the United States and Europe, including through anti-corruption and anti-competition laws. Any non-compliance by us with applicable laws and regulations or the failure to maintain, renew or obtain necessary permits and licenses could result in criminal, civil and administrative penalties and could have an adverse effect on our results of operations.

Additionally, jurisdictions in which we operate may enact new laws or regulations in the future that would negatively affect our business and results of operations. For example, the European Union is considering

 

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the “Artificial Intelligence Act” which seeks to regulate the use of AI technologies. The act is in the early stages of the legislative process and while there is a chance its terms may have an impact on the AI/ML technologies underlying our EVOpanHunter offering, it is too early to predict to what extent, if at all, its passage might impact our operations.

Because we and our suppliers are subject to environmental, health and safety laws and regulations as well as supply chain due diligence laws, we may become exposed to liability and substantial expenses in connection with human rights and environmental compliance or remediation activities.

Our operations, including our research, development, testing and manufacturing activities are subject to numerous environmental, health and safety laws and regulations. These laws and regulations govern, among other things, the controlled use, handling, release and disposal of, and the maintenance of a registry for, hazardous materials and biological materials. Our operations involve the use of hazardous and flammable materials, including chemicals and biological materials. Our operations also produce hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. In the event of contamination or injury resulting from the use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties for failure to comply with such laws and regulations.

Based on the recently adopted German Supply Chain Due Diligence Act (Gesetz über die unternehmerischen Sorgfaltspflichten zur Vermeidung von Menschenrechtsverletzungen in Lieferketten), which could become effective with respect to Evotec as early as January 1, 2023, but in any event by 2024, we will be obliged to, among others, conduct human rights and environmental due diligence in our own entities as well as in respect to our direct and indirect suppliers, to establish a risk management system and to fulfil record keeping and reporting duties. Due diligence duties encompass (amongst other things) conducting annual risk assessments and third-party due diligence as well as establishing grievance and remediation mechanisms. In case of non-compliance the German Supply Chain Due Diligence Act provides for the imposition of administrative fines of up to two percent of the average annual revenues and, until proof of self-cleaning, the exclusion from public procurement. In line with general German tort law provisions civil liability could arise. Similar supply chain due diligence legislation that would be applicable to us is projected at the EU level.

Environmental, health and safety laws and regulations as well as supply chain laws are becoming more stringent. We may be required to incur substantial expenses in connection with future human rights and environmental compliance or remediation activities, in which case, our production and development efforts may be interrupted or delayed and our financial condition and results of operations may be materially adversely affected.

If we fail to comply with certain healthcare laws, including fraud and abuse laws, we could face substantial penalties and our business, results of operations, financial condition and prospects could be adversely affected.

Even though we do not bill directly to Medicare, Medicaid or other third-party payors, certain federal and state healthcare laws and regulations pertaining to fraud and abuse are and will be applicable to our business activities and the activities of our customers. We could be subject to healthcare fraud and abuse laws of both the federal government and the states in which we conduct our business. Because of the breadth of these laws and the narrowness of available statutory and regulatory exceptions, it is possible that some of our business activities could be subject to challenge under one or more of such laws. If we or our operations are found to be in violation of any of these laws or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, imprisonment and the curtailment or restructuring of our operations, which could materially adversely affect our ability to operate our business and our financial results.

 

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We are in the process of engaging a new auditor, the timing of which is uncertain.

On June 15, 2021, the Supervisory Board engaged Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft (EY) as the statutory auditor, based on the resolution of the June 15, 2021 Annual General Meeting, to audit the consolidated financial statements as of December 31, 2021, and the group management report. On June 18, 2021, EY was also appointed the Company’s independent registered public accounting firm. On September 30, 2021, EY notified the Company that EY had determined, based on a ruling by the German Auditor Oversight Body (Abschlussprüferaufsichtsstelle, APAS), that EY would not be independent for German statutory purposes for the year ended December 31, 2021. APAS has ruled that PCAOB audit services for the Company’s U.S. initial public offering represent non-audit services for purposes of German statutory independence and thus are subject to a fee cap. As EY’s fees for services related to the U.S. initial public offering are expected to exceed the fee cap, EY would not be independent for purposes of the German statutory audit for the fiscal year ended December 31, 2021. As a result, as of and for the year ended December 31, 2021, we have decided to engage a new independent registered accounting firm and will shortly start the necessary court process in Germany to effect the replacement of EY as statutory auditor.

We are in the process of engaging a new auditor, the timing of which is uncertain due to complex judicial procedures for appointing a statutory auditor in these circumstances under German law. Transitioning to a new auditor will require substantial time and attention from our management, including accounting and finance personnel. The transition could require even more resources if we are unable to timely engage a new firm and begin the transition. Any delay or difficulties encountered in connection with engaging and transitioning to working with a new auditor could result in our inability to timely comply with our periodic filing requirements, including our statutory financial statements and our first annual report on Form 20-F.

Risks Related to this Offering and Our Ordinary Shares

An active trading market for the ADSs may not develop.

As of the date of this prospectus, there is no public market on a U.S. national securities exchange for our ordinary shares or ADSs representing our ordinary shares. The initial public offering price for the ADSs was determined through negotiations with the underwriters. Although we have applied to list the ADSs on the Nasdaq Global Select Market, an active trading market for the ADSs may never develop or be sustained following this offering. If an active market for the ADSs does not develop, it may be difficult for you to sell ADSs you purchase in this offering without depressing the market price for the ADSs, or at all.

The price of our ADSs may be volatile and fluctuate due to factors beyond our control.

The price of the securities of publicly traded pharmaceutical and biotechnology and drug discovery and development companies has been highly volatile and is likely to remain highly volatile in the future. The market price of our ADSs may fluctuate significantly due to a variety of factors, including the following:

 

   

positive or negative results of testing and clinical trials by our partners;

 

   

delay in entering into partnerships with respect to the development or commercialization of proprietary pipeline assets or entry into partnerships on terms that are not deemed favorable to us;

 

   

technological innovations or commercial product introductions by us or competitors;

 

   

changes in government regulation;

 

   

developments concerning proprietary rights, including patents and litigation matters;

 

   

public concerns relating to the commercial value or safety of our partners’ assets;

 

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financing or other corporate transactions;

 

   

publication of research reports or comments by securities or industry analysts;

 

   

general market conditions in the pharmaceutical industry or the economy as a whole;

 

   

foreign exchange rate fluctuations; and

 

   

other events and factors, many of which are beyond our control.

These and other industry and market factors may cause the market price and demand for our securities to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their ADSs and may otherwise negatively affect the liquidity of the ADSs. In addition, the stock market in general, and pharmaceutical and biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies.

If you purchase ADSs in this offering, you will incur immediate and substantial dilution in the book value of your investment.

You will incur immediate and substantial dilution in the net tangible book value of the ADSs if you purchase ADSs in this offering. Based on an assumed initial public offering price of $                per ADS, which is the midpoint of the price range set forth on the cover page of this prospectus, after giving effect to this offering, purchasers of ADSs in this offering will experience immediate dilution in net tangible book value of $                per ADS. In addition, after giving effect to this offering, investors purchasing ADSs in this offering will contribute        % of the total amount invested by shareholders since inception but will only own        % of the ordinary shares outstanding. See “Dilution” for a more detailed description of the dilution to new investors in the offering.

Raising additional capital may cause dilution to our existing shareholders or restrict our operations.

We may seek additional capital from time to time through a combination of equity offerings and debt financings. To the extent that we raise additional capital through the sale of equity securities, including securities convertible or exchangeable into ordinary shares, your ownership interest will be diluted and the terms may include liquidation or other preferences that adversely affect your rights as a holder of ADSs. The incurrence of indebtedness would result in increased fixed payment obligations and could involve restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business.

We are an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies may make our ordinary shares and the ADSs less attractive to investors.

We are an “emerging growth company” under the JOBS Act, and we will remain an emerging growth company until the earlier of:

 

   

the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion;

 

   

the date on which we have issued more than $1 billion in nonconvertible debt securities during the previous three years;

 

   

the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC, which means the first day of the year following the first year as a public company in which, as of the last business day of our most recently completed second fiscal quarter, the market value of our common equity held by non-affiliates exceeds $700 million; or

 

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the last day of the fiscal year following the fifth anniversary of the date of the completion of this offering.

For so long as we continue to be an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are otherwise applicable to U.S. public companies. These exemptions include:

 

   

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;

 

   

not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

   

reduced disclosure obligations regarding executive compensation; and

 

   

not being required to hold a nonbinding advisory vote on executive compensation and obtain shareholder approval of any golden parachute payments not previously approved.

We may choose to take advantage of certain or all of the above available exemptions. We have taken advantage of reduced reporting burdens in this prospectus. In particular, we have not included all of the executive compensation information that would be required if we were not an emerging growth company. We cannot predict whether investors will find the ADSs less attractive if we rely on certain or all of these exemptions. If some investors find the ADSs less attractive as a result of our reliance on certain exemptions, there may be a less active trading market for the ADSs and the price per ADS may be more volatile.

In addition, the JOBS Act provides that an emerging growth company may take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. Such provisions are only applicable under U.S. GAAP. As a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required or permitted by the IASB.

As a “foreign private issuer,” we are exempt from certain rules under the U.S. securities laws, as well as Nasdaq rules, and we are permitted to file less information with the SEC than U.S. companies. This may limit the information available to holders of the ADSs and may make our ordinary shares and the ADSs less attractive to investors.

We are a “foreign private issuer,” as defined in the rules and regulations of the SEC, and, consequently, we are not subject to all of the disclosure requirements applicable to companies organized within the United States. For example, we are exempt from certain rules under the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act, that regulate disclosure obligations and procedural requirements related to the solicitation of proxies, consents or authorizations applicable to securities registered under the Exchange Act. In addition, our officers and directors are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases and sales of our securities. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. public companies. Accordingly, there may be less publicly available information about our company than there is for U.S. public companies.

As a foreign private issuer, we will file an annual report on Form 20-F within four months of the close of each fiscal year ending December 31 and reports on Form 6-K relating to certain material events promptly after we publicly announce these events.

 

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As a foreign private issuer, we are permitted to follow home country practice in lieu of certain Nasdaq corporate governance requirements. We therefore intend to continue to follow German corporate governance practices in lieu of the corporate governance requirements of Nasdaq in certain respects. In particular, we intend to follow German corporate governance practices in connection with the distribution of annual and interim reports to shareholders, the holding of annual meetings, proxy solicitations in connection with shareholders’ meetings, quorum requirements, supervisory board composition, executive session scheduling, compensation committee requirements, shareholders’ vote regarding all equity compensation plans, disclosure of individual compensation for the company’s directors and management, and obtaining shareholder approval in connection with the establishment of or material amendment to certain equity-based compensation plans. We also intend to continue to follow German corporate governance practices in lieu of certain corporate governance requirements promulgated by the SEC, including procedures related to the disclosure of code of conduct and ethics waivers.

Due to the above exemptions for foreign private issuers, our shareholders will not be afforded the same protections or information generally available to investors holding shares in public companies organized in the United States. As a result, some investors may find the ADSs less attractive, and there may be a less active trading market for the ADSs. If we were to no longer qualify as a foreign private issuer we would be subject to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact the manner in which we operate our business.

A U.S. Holder (as defined in Taxation—Material U.S. Federal Income Tax Considerations) of ADSs may suffer adverse U.S. federal income tax consequences if we are a PFIC for any taxable year.

Under the United States Internal Revenue Code of 1986, as amended, or the Code, we will be a PFIC for any taxable year in which, after the application of certain look-through rules with respect to subsidiaries, either (i) 75% or more of our gross income consists of “passive income,” or (ii) 50% or more of the average quarterly value of our assets consists of assets that produce, or are held for the production of, “passive income.” Passive income generally includes dividends, interest, certain non-active rents and royalties, and capital gains. Whether we or any of our subsidiaries will be a PFIC in 2021 or any future year is a factual determination that must be made annually at the close of each taxable year, and, thus, is subject to significant uncertainty, because among other things (i) we currently own, and may continue to own after the closing of the offering, a substantial amount of passive assets, including cash and securities that may give rise to passive income, (ii) the valuation of our assets that may generate non-passive income for PFIC purposes, including our intangible assets, is uncertain and may vary substantially over time, (iii) the treatment of grants as income for U.S. federal income tax purposes is unclear, and (iv) the composition of our income, if any, may vary substantially over time. Accordingly, there can be no assurance that we will not be a PFIC in 2021 or any future taxable year. If we are a PFIC for any taxable year during which a U.S. Holder (as defined in Taxation—Material U.S. Federal Income Tax Considerations) holds ADSs, we generally would continue to be treated as a PFIC with respect to that U.S. investor for all succeeding years during which the U.S. Holder holds ADSs even if we ceased to meet the threshold requirements for PFIC status, unless certain exceptions apply. Such a U.S. Holder may be subject to adverse U.S. federal income tax consequences, including (i) the treatment of all or a portion of any gain on disposition as ordinary income, (ii) the application of a deferred interest charge on such gain and the receipt of certain dividends and (iii) compliance with certain reporting requirements. There is no assurance that we will provide information that will enable investors to make a qualified electing fund election, also known as a QEF Election, that could mitigate the adverse U.S. federal income tax consequences should we be classified as a PFIC.

For further discussion, see “Taxation—Material U.S. Federal Income Tax Considerations.”

U.S. investors may have difficulty enforcing civil liabilities against our company, members of our Supervisory Board and Management Board and the experts named in this prospectus.

We are incorporated under the laws of Germany as a European stock corporation (Societas Europaea) pursuant to the Council Regulation (EC) No 2157/2001 of October 8, 2001 on the Statute for a European

 

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company, or the SE Regulation; and the German Act on the Implementation of Council Regulation (EC) No 2157/2001 of October 8, 2001 on the Statute for a European company (SE) (Gesetz zur Ausführung der Verordnung (EG) NR. 2157/2001 des Rates vom 8. Oktober 2001 über das Statut der Europäischen Gesellschaft (SE) (SE-Ausführungsgesetz—SEAG). The majority of our assets are located outside the United States and all of the members of our Management Board and Supervisory Board reside outside of the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or to enforce against them or us in U.S. courts’ judgments predicated upon the civil liability provisions of the federal securities laws of the United States. In addition, awards of punitive damages in actions brought in the United States or elsewhere may be unenforceable in Germany. An award for monetary damages under the U.S. securities laws would be considered punitive if it does not seek to compensate the claimant for loss or damage suffered and is intended to punish the defendant. The enforceability of any judgment in Germany will depend on the particular facts of the case as well as the laws and treaties in effect at the time. There is currently no treaty between the United States and Germany providing for reciprocal recognition and enforceability of judgments rendered in civil and commercial matters, though recognition and enforcement of foreign judgments in Germany is possible in accordance with applicable German laws. Litigation in Germany is also subject to rules of procedure that differ from the U.S. rules, including with respect to the taking and admissibility of evidence, the conduct of the proceedings and the allocation of costs. Proceedings in Germany would have to be conducted in the German language, and all documents submitted to the court would, in principle, have to be translated into German. For these reasons, it may be difficult for a U.S. investor to bring an original action in a German court predicated upon the civil liability provisions of the U.S. federal securities laws against us or any members of our Management Board or Supervisory Board.

German and other non-U.S. courts may refuse to hear a U.S. securities law claim if jurisdiction cannot be established under German law. Even if a non-U.S. court agrees to hear a claim, it may determine that the law of the jurisdiction in which the court resides, and not U.S. law, is applicable to the claim. Further, even if U.S. law is found to be applicable, the content of applicable U.S. law must be proved as fact, which can be a time-consuming and costly process, and certain matters of procedure would still be governed by the law of the jurisdiction in which the foreign court resides.

For more information, please see “Service of Process and Enforcement of Liabilities.”

The rights of shareholders in a stock corporation subject to German law differ in material respects from the rights of shareholders of corporations incorporated in the United States.

We are a European stock corporation (Societas Europaea) with our registered office in Germany. Our corporate affairs are governed by the laws governing stock corporations and European stock corporations incorporated in Germany, the SE Regulation and our articles of association. The rights of shareholders may be different from the rights and obligations of shareholders in companies governed by the laws of U.S. jurisdictions. Among other differences in shareholder rights, under German law, certain important resolutions, including, for example, capital decreases, measures under the German Transformation Act (Umwandlungsgesetz), such as mergers, conversions and spin-outs and the dissolution of the German stock corporation apart from insolvency and certain other proceedings, require the vote of a 75% majority of the capital present or represented at the relevant shareholders’ meeting. Therefore, the holder or holders of a blocking minority of more than 25% or, depending on the attendance level at the shareholders’ meeting, the holder or holders of a smaller percentage of the shares in a European stock corporation may be able to block any such votes, possibly to our detriment or the detriment of other shareholders.

As a general rule under German law, in the case of a two-tier European stock corporation, a shareholder has no direct recourse against the members of the management board and the supervisory board, in the event that it is alleged that they have breached their duty of loyalty or duty of care to the corporation. Apart from insolvency or other special circumstances, only the European stock corporation itself has the right to claim damages from members of the management and supervisory boards. A European stock corporation may waive or

 

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settle these damages claims only if at least three years have passed and the shareholders approve the waiver or settlement at the shareholders’ meeting with a simple majority of the votes cast, provided that a minority holding, in the aggregate, 10% or more of the European stock corporation’s share capital does not have its opposition formally noted in the minutes maintained by a German civil law notary.

In addition, the responsibilities of members of our Management Board and Supervisory Board may differ from the duties of directors of U.S. corporations. In the performance of their duties, our Management Board and Supervisory Board may take into account a broad range of considerations, including our interests, the interests of our shareholders, employees, creditors and, to a limited extent, the general public. It is possible that some of these parties will have interests that are different from, or in addition to, your interests as a holder of ADSs.

For more information, we have provided summaries of relevant German corporate law and of our articles of association under “Management” and “Description of Share Capital and Articles of Association (Satzung).”

We do not anticipate paying any cash dividends on our ordinary shares in the foreseeable future and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of the ADSs. If we were to pay dividends, holders of the ADSs may be unable to claim tax credits with respect to, or tax refunds to reduce German withholding tax applicable to, the payment of such dividends, or such dividends may effectively be taxed twice.

We have never paid or declared any cash dividends on our ordinary shares, and we do not anticipate paying any cash dividends on our ordinary shares in the foreseeable future. You are not likely to receive any dividends on your ADSs, and the success of an investment in ADSs will depend upon any future appreciation in its value. Investors may need to sell all or part of their holdings of ADSs after price appreciation, which may never occur, to realize any future gains on their investment. There is no guarantee that the ADSs will appreciate in value or even maintain the price at which our shareholders have purchased the ADSs.

As a German tax resident company, if we were to pay dividends, such dividends will in principle be subject to German withholding tax. Currently, the applicable German withholding tax rate is in principle 26.375% of the gross dividend. This German tax can, e.g., be reduced to the Convention between the Federal Republic of Germany and United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital and Certain Other Taxes of 1989, as amended by the Protocol as of June 4, 2008 (Abkommen zwischen der Bundesrepublik Deutschland und den Vereinigten Staaten von Amerika zur Vermeidung der Doppelbesteuerung und zur Verhinderung der Steuerverkürzung auf dem Gebiet der Steuern vom Einkommen und vom Vermögen und einiger anderer Steuern in der Fassung vom 4. Juni 2008), hereinafter referred to as the “Treaty”, rate, which in the vast majority of cases should be 15%, if, among others, the applicable taxpayer is eligible for such Treaty rate and files an application supplemented by a specific German tax certificate with the German Federal Central Tax Office (Bundeszentralamt für Steuern). If such a tax certificate cannot be delivered to the ADS holder, for example due to applicable settlement mechanics or lack of information regarding the ADS holder, such holder may be unable to benefit from the double tax treaty relief and may be unable to claim a credit of withholding tax in excess of the applicable Treaty rate in its jurisdiction of residence. Further, the payment made to the ADS holder equal to the net dividend may qualify, under the tax law applicable to the ADS holder, as taxable income that is in turn subject to withholding, which could mean that a dividend is effectively taxed twice. There can be no guarantee that the information delivery requirement can be satisfied in all cases, which could result in adverse tax consequences for affected ADS holders. ADS holders should note that the circular issued by the German Federal Ministry of Finance (BMF-Schreiben), dated May 24, 2013 (reference number IV C 1-S2204/12/10003), as amended by the circular dated December 18, 2018 (reference number IV C 1-S2204/12/10003), in respect of the taxation of American Depositary Receipts, or ADRs, on domestic shares, or the ADR Tax Circular, is, e.g., not binding on German courts, and there is no certainty as to whether a German tax court will follow the ADR Tax Circular in

 

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determining the German tax treatment of the ADSs. In addition, the ADR Tax Circular does not include details on how an ADR program should be designed in order to, e.g., fall within the scope of application of the ADR Tax Circular. If, e.g., the ADSs were determined not to fall within the scope of application of the ADR Tax Circular, or a German tax court did not follow the ADR Tax Circular, and profit distributions made with respect to the ADSs were not treated as a dividend for German tax purposes, a holder of the ADSs might not be entitled to a refund of any taxes withheld on the dividends under German tax law and profit distributions made with respect to the ADSs may be effectively taxed twice.

The tax treatment of ADSs by German tax authorities is subject to change and might have negative implications for investment fund investors.

The specific treatment of ADSs in Germany is based on domestic German tax laws, including, but not limited to, circulars issued by German tax authorities, which, e.g., are not binding on the German courts and the Treaty (defined above). The pertinent laws are subject to change, possibly with retroactive effect. For example, tax authorities may modify their interpretation of acts of parliament and the current treatment of ADSs may change.

According to the circular issued by the German Federal Ministry of Finance (BMF-Schreiben), dated May 21, 2019 (reference number IV C 1 – S 1980-1/16/10010 :001), ADSs are not treated as capital participations (Kapitalbeteiligungen) within the meaning of Section 2 Para. 8 of the Investment Tax Code (Investmentsteuergesetz). Such interpretation by the fiscal authorities may have adverse effects e.g. on the taxation of investors which have invested in an investment fund holding ADSs.

You may not receive distributions on the ordinary shares underlying 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 the cash dividends or other distributions, if any, that it or the custodian receives on our ordinary shares after deducting any withholding taxes or other governmental expenses that must be paid and its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impracticable to make a distribution available to any holders of ADSs. We have no obligation to take any other action to permit the distribution to ADS holders. This means that you may not receive the distributions we make on our ordinary shares or any value from them if it is unlawful or impractical for us to make them available for you. These restrictions may have a material adverse effect on the value of your ADSs.

The dual listing of our shares and the ADSs following this offering may adversely affect the liquidity and value of the ADSs.

Following this offering and after the ADSs are traded on the Nasdaq Global Select Market, our shares will continue to be listed on the Frankfurt Stock Exchange. Trading of the ADSs or shares in these markets will take place in different currencies (U.S. dollars on the Nasdaq Global Select Market and Euros on the Frankfurt Stock Exchange), and at different times (resulting from different time zones, different trading days and different public holidays in the United States and Germany). The trading prices of our shares on these two markets may differ due to these and other factors. Any decrease in the price of our shares on the Frankfurt Stock Exchange could cause a decrease in the trading price of the ADSs on the Nasdaq Global Select Market. Investors could seek to sell or buy our shares to take advantage of any price differences between the markets through a practice referred to as arbitrage. Any arbitrage activity could create unexpected volatility in both our share prices on one exchange, and the shares available for trading on the other exchange. In addition, holders of ADSs will not be immediately able to surrender their ADSs and withdraw the underlying shares for trading on the other market without effecting necessary procedures with the depositary. This could result in time delays and additional cost for holders of ADSs. We cannot predict the effect of this dual listing on the value of our ordinary shares and the

 

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ADSs. However, the dual listing of our shares and the ADSs may reduce the liquidity of these securities in one or both markets and may adversely affect the development of an active trading market for the ADSs in the United States. Furthermore, in connection with any distributions of payments under the deposit agreement, the depositary may convert foreign currency itself or through any of its affiliates and, in those cases, acts as principal for its own account and not as an agent, fiduciary or broker on behalf of any other person and earns revenue, including, without limitation, fees and spreads that it will retain for its own account. The depositary makes no representation that the exchange rate used or obtained in any currency conversion will be the most favorable rate that could be obtained at the time or as to the method by which that rate will be determined, subject to its obligations under the deposit agreement.

Future sales, or the perception of future sales, of a substantial number of our shares or ADSs could adversely affect the price of the ADSs, and actual sales of our equity will dilute shareholders and ADS holders.

Future sales of a substantial number of our shares or ADSs, or the perception that such sales will occur, could cause a decline in the market price of the ADSs. As of June 30, 2021, we had 164,608,236 ordinary shares issued. Shares underlying the ADSs offered in this offering may be resold in the public market immediately without restriction, unless purchased by our affiliates. If, after the period during which lock-up agreements restrict sales of the ADSs and shares, these shareholders sell substantial amounts of shares or ADSs in the public market, or the market perceives that such sales may occur, the market price of the ADSs and our ability to raise capital through an issue of equity securities in the future could be adversely affected.

Holders of the ADSs are not treated as shareholders of our company.

By participating in this offering you will become a holder of ADSs with underlying shares in a European stock corporation. Holders of the ADSs are not treated as our shareholders, unless they withdraw the shares underlying the ADSs from the depositary. The depositary is the holder of the shares underlying the ADSs. Holders of ADSs therefore do not have any rights as shareholders of our company, other than the rights that they have pursuant to the deposit agreement.

You may not be able to exercise your right to vote the shares underlying your ADSs.

Holders of ADSs may exercise voting rights with respect to the shares represented by the ADSs only in accordance with the provisions of the deposit agreement. You may instruct the depositary to vote the number of whole deposited shares your ADSs represent. The depositary will notify you of shareholders’ meetings and arrange to deliver our voting materials to you if we ask it to. Those materials will describe the matters to be voted on and explain how you may instruct the depositary how to vote. For instructions to be valid, they must reach the depositary by a date set by the depositary.

You may instruct the depositary to vote the shares underlying your ADSs. Otherwise, you will not be able to exercise your right to vote, unless you withdraw the shares underlying the ADSs you hold. We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your 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 provided that any such failure is in good faith. This means that you may not be able to exercise your right to vote and there may be no remedies available to you if the shares underlying your ADSs are not voted as you requested. If we do not instruct the depositary to obtain your voting instructions, you can still instruct the depositary how to vote, and the depositary may vote as you instruct, but it is not required to do so.

 

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Your right as a holder of ADSs to participate in any future preemptive subscription rights issues or to elect to receive dividends in shares may be limited, which may cause dilution to your holdings.

Under German law, the existing shareholders generally have a preemptive right to subscribe for shares offered in proportion to the amount of shares they hold in connection with any offering of shares. However, a shareholders’ meeting may vote, by a majority, which represents at least three quarters of the share capital represented at the meeting, to exclude this preemptive right provided that, from the company’s perspective, there exists good and objective cause for such exclusion.

Certain non-German shareholders may not be able to exercise their preemptive subscription rights in our future offerings due to the legislation and regulations of their home country. For example, ADS holders in the United States will not be entitled to exercise or sell such rights unless we register the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. In addition, the deposit agreement provides that the depositary need not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, ADS holders may be unable to participate in our rights offerings and may experience dilution in their holdings. In addition, if the depositary is unable to sell 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 be subject to limitations on transfers of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of 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 of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

Our management will have broad discretion in the application of the net proceeds that we receive from this offering, including applications for working capital, possible acquisitions and other general corporate purposes, and we may spend or invest these proceeds in a way with which our shareholders disagree. The failure by our management to apply these funds effectively could harm our business and financial condition. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value. These investments may not yield a favorable return to our investors.

General Risks

We will incur increased costs and demands upon management as a result of being a public company listed in the United States.

As a public company listed in the United States, we will incur significant additional legal, accounting and other costs. These additional costs could negatively affect our financial results. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including regulations implemented by the SEC and the Nasdaq Global Select Market, may increase legal and financial compliance costs and make some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies.

 

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We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If notwithstanding our efforts to comply with new laws, regulations and standards, we fail to comply, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

Failure to comply with these rules might also make it more difficult for us to obtain some types of insurance, including directors’ and officers’ liability insurance, and we might be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, shareholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our shares.

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act of 2002, or any subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements, or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our shares.

For as long as we are an “emerging growth company” under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404. We could be an “emerging growth company” for up to five years. An independent assessment of the effectiveness of our internal controls could detect problems that our management’s assessment might not. Undetected material weaknesses in our internal controls could lead to financial statement restatements and require us to incur the expense of remediation.

Our employees, independent contractors, principal investigators, CROs, consultants, vendors and partnership partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements.

We are exposed to the risk that our employees, independent contractors, principal investigators, CROs, consultants, vendors and partnership partners may engage in fraudulent conduct or other illegal activities. Misconduct by these parties could include intentional, reckless and negligent conduct or unauthorized activities that violate, among other things: (i) the legal requirements or other requirements of the EMA, the FDA and comparable authorities, including those laws that require the reporting of true, complete and accurate information to such authorities; (ii) manufacturing standards; (iii) data privacy, security, fraud and abuse and other healthcare laws and regulations; or (iv) laws that require the reporting of true, complete and accurate financial information and data.

There is no certainty that all of our employees, agents, contractors, or partners, or those of our affiliates, will comply with all applicable laws and regulations, particularly given the high level of complexity of these laws. It is not always possible to identify and deter misconduct by employees and other third-parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with such laws or regulations. Additionally, we are subject to the risk that a person could allege such fraud or other misconduct, even if none occurred. If any such actions are instituted against us, and we are

 

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not successful in defending ourselves or asserting our rights, those actions could result in significant administrative, civil and criminal fines and sanctions against us, our officers, or our employees, the closing down of our facilities, requirements to obtain export licenses, cessation of business activities in sanctioned countries, exclusion from participation in federal healthcare programs including Medicare and Medicaid, implementation of compliance programs, integrity oversight and reporting obligations, and prohibitions on the conduct of our business. Any such violations could include prohibitions on our ability to offer our partners’ products in one or more countries and could materially damage our reputation, our brand, our international expansion efforts, our ability to attract and retain employees, and our business, prospects, operating results and financial condition.

Actual or perceived failures to comply with applicable data protection, privacy and security laws, regulations, standards and other requirements could adversely affect our business, results of operations, and financial condition. We receive and store increasing volumes of sensitive information, such as employee, personal and pseudonymized patient data as well as human biological materials. We are subject to a variety of local, state, national and international laws, directives and regulations that apply to the collection, use, storage, retention, protection, disclosure, transfer and other processing of personal data, collectively referred to as “data processing”, in the different jurisdictions in which we operate, including comprehensive regulatory systems in the United States and Europe. Legal requirements relating to data processing continue to evolve and may result in ever-increasing public scrutiny and escalating levels of enforcement, sanctions and increased costs of compliance.

As our operations and business grow, we may become subject to or affected by new or additional data protection laws and regulations and face increased scrutiny or attention from regulatory authorities. In the United States, HIPAA imposes, among other things, certain standards relating to the privacy, security, transmission and breach reporting of individually identifiable health information. Certain states have also adopted comparable privacy and security laws and regulations, some of which may be more stringent than HIPAA. Such laws and regulations will be subject to interpretation by various courts and other governmental authorities, thus creating potentially complex compliance issues for us and our future customers and strategic partners. Further, many state legislatures have adopted legislation that regulates how businesses operate online, including measures relating to privacy, data security and data breaches. Laws in all 50 states require businesses to provide notice to customers whose personally identifiable information has been disclosed as a result of a data breach. The laws are not consistent, and compliance in the event of a widespread data breach is costly. States are also constantly amending existing laws, requiring attention to frequently changing regulatory requirements. For example, the California Consumer Privacy Act of 2018 (“CCPA”), went into effect on January 1, 2020. The CCPA creates individual privacy rights for California consumers and increases the privacy and security obligations of entities handling certain personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA may increase our compliance costs and potential liability, and many similar laws have been proposed at the federal level and in other states. Further, the California Privacy Rights Act (“CPRA”), recently passed in California. The CPRA will impose additional data protection obligations on covered businesses, including additional consumer rights processes, limitations on data uses, new audit requirements for higher risk data, and opt outs for certain uses of sensitive data. It will also create a new California data protection agency authorized to issue substantive regulations and could result in increased privacy and information security enforcement. The majority of the provisions will go into effect on January 1, 2023, and additional compliance investment and potential business process changes may be required. In the event that we are subject to or affected by HIPAA, the CCPA, the CPRA or other domestic privacy and data protection laws, any liability from failure to comply with the requirements of these laws could adversely affect our financial condition.

In the European Union, the GDPR went into effect in May 2018. The GDPR has far-reaching extraterritorial effect so that it applies to, amongst others, any business, regardless of its location, that processes personal data of EEA residents in relation to offering goods or services to such EEA residents. The GDPR imposes strict requirements on controllers and processors of personal data, including special protections for “special categories of personal data” which includes health and genetic information of data subjects residing in

 

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the EEA. Under the GDPR, subjects of data processing are entitled to obtain from the controller a range of information related to the data processing activities, as well as to be informed of safeguards regarding the international transfer of data and to request a copy of all data being process related to that subject. The GDPR also imposes strict rules on the transfer of personal data out of the European Union to the United States and other countries. In July 2020, the Court of Justice of the European Union, or the CJEU, limited how organizations could lawfully transfer personal data from the European Union to the United States by invalidating the EU-US Privacy Shield Framework for purposes of international transfers and imposing further restrictions on use of the standard contractual clauses, or SCCs. These restrictions include a requirement for companies to carry out a transfer impact assessment which, among other things, assesses the laws governing access to personal data in the recipient country and considers whether supplementary measures that provide privacy protections additional to those provided under SCCs will need to be implemented to ensure an essentially equivalent level of data protection to that afforded in the European Union. The European Commission issued revised SCCs on June 4, 2021 to account for the decision of the CJEU and recommendations made by the European Data Protection Board. As supervisory authorities issue further guidance on personal data export mechanisms, including circumstances where the SCCs cannot be used, and/or start taking enforcement action, we could suffer additional costs, complaints and/or regulatory investigations or fines, and/or if we are otherwise unable to transfer personal data between and among countries and regions in which we operate, it could affect the manner in which we provide our services, the geographical location or segregation of our relevant systems and operations, and could adversely affect our financial results. In addition, the GDPR provides that European Union member states may make their own local further laws and regulations limiting the processing of personal data, including genetic, biometric or health data.

We are subject to the GDPR because we are located in the EEA. Additionally, as the GDPR applies extraterritorially, we are also subject to the GDPR even where our data processing activities occur outside of the EEA if such activities involve the personal data of individuals located in the EEA. GDPR regulations have imposed additional responsibility and liability in relation to the personal data that we process and we may be required to put in place additional mechanisms to ensure compliance with the new data protection rules. If we fail to comply with the GDPR and the applicable national data protection laws of the European Union member states, or if regulators assert we have failed to comply with these laws, it may lead to regulatory enforcement actions or other administrative penalties, including but not limited to monetary penalties of up to €20,000,000 or up to 4% of our total worldwide annual turnover of the preceding financial year, whichever amount is higher. This may be onerous and may interrupt or delay our development activities, and adversely affect our business, financial condition and results of operations.

Further, from January 1, 2021, we have to comply with the GDPR and also the UK GDPR, which, together with the amended UK Data Protection Act 2018, retains GDPR in United Kingdom national law. The UK GDPR mirrors the potential administrative fines under the GDPR, i.e., it provides for fines up to the greater of £17.5 million or 4% of global turnover. The European Commission has adopted an adequacy decision in favor of the United Kingdom, enabling data transfers from EU member states to the United Kingdom without additional safeguards. However, the United Kingdom adequacy decision will automatically expire in June 2025 unless the European Commission re-assesses and renews/extends that decision. The relationship between the United Kingdom and the European Union in relation to certain aspects of data protection law remains unclear, and it is unclear how United Kingdom data protection laws and regulations will develop in the medium to longer term, and how data transfers to and from the United Kingdom will be regulated in the long term. These changes may lead to additional costs and increase our overall risk exposure.

Other jurisdictions outside the European Union are similarly introducing new or enhancing existing privacy and data security laws, rules and regulations, which could increase our compliance costs and the risks associated with non-compliance. Privacy and data security laws are rapidly evolving and the future interpretation of those laws is somewhat uncertain. We cannot guarantee that we are, or will be, in compliance with all applicable international regulations as they are enforced now or as they evolve. For example, our privacy policies may be insufficient to protect any personal information we collect, or may not comply with applicable laws, in

 

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which case we may be subject to regulatory enforcement actions, lawsuits or reputational damage, all of which may adversely affect our business. There is significant uncertainty related to the manner in which data protection authorities will seek to enforce compliance with privacy and data security laws, including the GDPR. Enforcement uncertainty and the costs associated with ensuring compliance with privacy and data security laws, including the GDPR may be onerous and adversely affect our business, financial condition, results of operations and prospects. If any of these events were to occur, our business and financial results could be significantly disrupted and adversely affected.

We may be subject to product liability claims.

We may be responsible for product liability stemming from product research, development or manufacturing, and we may face an even greater risk if any drug candidate that we develop is commercialized. If we cannot successfully defend ourselves against claims that drug products we develop with our partners caused injuries, we could incur substantial liabilities. Regardless of the merit or eventual outcome of such claims, any liability claims may result in:

 

   

decreased demand for any drug product that we may develop with our partners;

 

   

loss of revenue;

 

   

substantial monetary awards to patients, healthy volunteers or their children;

 

   

significant time and costs to defend the related litigation;

 

   

withdrawal of clinical trial participants;

 

   

initiation of investigations by regulators;

 

   

inability to commercialize any drug product that we may develop with our partners; and

 

   

injury to our reputation and significant negative media attention.

We are covered by liability insurance, but notwithstanding such coverage, our financial position or results could be negatively affected by product liability claims. On occasion, large judgments have been awarded in class action lawsuits based on drugs or medical treatments that had unanticipated adverse effects. A product liability claim or series of claims brought against us could cause the price of the ADSs to decline and, if judgments exceed our insurance coverage, could adversely affect our results of operations and business.

After the completion of the offering, we may be at an increased risk of securities class action litigation.

Historically, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because pharmaceutical and biotechnology companies have experienced significant share price volatility in recent years. If we were to be sued, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business operations and financial performance and condition. Many of the forward-looking statements contained in this prospectus can be identified by the use of forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “should,” “target,” “would” and other similar expressions that are predictions of or indicate future events and future trends, although not all forward-looking statements contain these identifying words.

Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. Such statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors, including, but not limited to, those identified in the section titled “Risk Factors” in this prospectus. The forward-looking statements in this prospectus include, among others, statements regarding:

 

   

our ability to innovate sufficiently and continually remain at the forefront of precision medicine, including with respect to our platform technologies and our investment into the discovery of new pipeline assets, such that we retain our existing customers, broaden and deepen our customer relationships and gain new customers;

 

   

our ability to find suitable partners or agree on acceptable terms regarding our unpartnered pipeline assets;

 

   

the ability and timing of our partners to successfully develop, conduct trials of, obtain regulatory approval for and commercialize our pipeline assets;

 

   

our ability to properly allocate resources, retain the business of our existing customers, and successfully manage the expansion of our company, including with respect to our investments through EVOequity;

 

   

whether we can obtain a positive return on our equity investments;

 

   

the impact of the COVID-19 pandemic and any similar pandemic, epidemic or outbreak, on our business, financial condition, results of operations, cash flows and prospects;

 

   

the impact of the United Kingdom’s withdrawal from the European Union on our business and results of operations;

 

   

our ability to comply with the applicable laws and regulations, export and import controls, sanctions, embargoes, anti-corruption laws and anti-money-laundering laws;

 

   

our ability to adequately secure our information technology systems and the regulated data stored therein, as required by law;

 

   

our ability to obtain the substantial additional financing required to achieve our goals;

 

   

our ability to take advantage of R&D tax credits and tax loss carryforwards; and

 

   

our ability to sufficiently and timely obtain, maintain, protect, defend and/or enforce our intellectual property rights.

 

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The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. The forward-looking statements contained in this prospectus speak only as of the date of this prospectus, and unless otherwise required by law, we do not undertake any obligation to update them in light of new information or future developments or to release publicly any revisions to these statements in order to reflect later events or circumstances or to reflect the occurrence of unanticipated events.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering will be approximately $                 million (€                million) or approximately $                million (€                million) if the underwriters exercise in full their option to purchase an additional                ADSs), assuming an initial public offering price of $                 per ADS, the U.S. dollar equivalent of the closing price of our ordinary shares on the Frankfurt Stock Exchange of €                , on                     , 2021 at the exchange rate of $                 per euro, multiplied by the ADS-to-share ratio of 2 to 1, after deducting the estimated underwriting discounts and commissions.

Each $1.00 increase (decrease) in the assumed initial public offering price of $                per ADS, would increase (decrease) the net proceeds to us from this offering by approximately $                million (€                million), assuming the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions. We may also increase or decrease the number of ADSs we are offering. An increase (decrease) of 1,000,000 in the number of ADSs offered by us would increase (decrease) the net proceeds to us from this offering by approximately $                million (€                    million), assuming no change in the assumed initial public offering price and after deducting the estimated underwriting discounts and commissions.

We currently intend to use the net proceeds from this offering as follows:

 

   

approximately $                 million to expand our biologics manufacturing capacity in the United States at the existing J.POD® facility in Redmond, Washington by fully building out the facility to six production trains and to continue to advance our end-to-end continuous biologics manufacturing technologies;

 

   

approximately $                 million for building additional J.POD® capacity in Toulouse, France;

 

   

approximately $                 million for expanding our precision medicine platform, which includes the expansion of our iPSC technology platform through building new capacities in Hamburg, Germany, expanding our EVOpanOmics / EVOpanHunter platforms to broaden access to patient derived samples and disease relevant data as well as expanding our capabilities to analyze the growing amount of data that is core to our business model;

 

   

approximately $                 million for unpartnered R&D in order to accelerate pipeline activities. We expect that the funds would support investments for the development of additional new programs, which could be further explored with partners in future; and

 

   

approximately $                 million to expand our portfolio of EVOequity investments through investments in new companies and participation in future financing rounds of our existing portfolio companies.

We expect to use the remainder of any net proceeds from this offering for general corporate purposes. We may also use a portion of the net proceeds to in-license or acquire or invest in complementary technologies, products, businesses or assets, either alone or together with a partner. However, we have no current plans, commitments or obligations to do so.

Our expected use of net proceeds from this offering represents our current intentions based on our present plans and business condition, which could change as our plans and business conditions evolve. The amounts and timing of our actual use of net proceeds will vary depending on numerous factors, including the successful launch of our first J.POD® facility in Redmond, Washington, the progress of the project development for setting up our second J.POD® facility in Toulouse, France and related funding from French authorities, the progress of our pre-clinical development of pipeline assets and the potential expansion of technology platforms as well as the progress and timing of our geographic, portfolio and pipeline expansion efforts. As a result, we cannot predict with certainty all of the particular uses for the net proceeds to be received upon the closing of this offering or the amounts that we will actually spend on the uses set forth above. Our management will have broad discretion in the application of the net proceeds from this offering.

Pending our use of the net proceeds from this offering, we plan to invest the net proceeds in short- and intermediate-term interest-bearing financial instruments.

 

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DIVIDEND POLICY

We have never paid or declared any cash dividends on our ordinary shares, and we do not anticipate paying any cash dividends on our ordinary shares in the foreseeable future. We intend to retain all available funds and any future earnings and reinvest them in the company’s further growth strategy to better leverage long-term growth and sustainability. All of the shares represented by the ADSs offered by this prospectus will generally have the same dividend rights as all of our other outstanding shares.

Under German law, we may pay dividends only from the distributable profit (Bilanzgewinn) reflected in our unconsolidated financial statements (as opposed to the consolidated financial statements for us and our subsidiaries) prepared in accordance with the principles set forth in the German Commercial Code (Handelsgesetzbuch) and adopted by our Management Board (Vorstand) and the Supervisory Board (Aufsichtsrat), or, as the case may be, by our shareholders in a general shareholders’ meeting. In addition, under German law we may not pay dividends before annual profits exceed the losses carried forward. See “Description of Share Capital and Articles of Association (Satzung),” which explains in more detail the procedures we must follow and the German law provisions that determine whether we are entitled to declare a dividend.

 

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CAPITALIZATION

The table below sets forth our cash, cash equivalents and investments and our capitalization as of June 30, 2021:

 

   

on an actual basis; and

 

   

on an as adjusted basis to give effect to our issuance and the sale of                ADSs by us in this offering, assuming an initial public offering price of $                per ADS, the U.S. dollar equivalent of the closing price of our ordinary shares on the Frankfurt Stock Exchange of €                 , on                     , 2021 at the exchange rate of $                 per euro, multiplied by the ADS-to-share ratio of 2 to 1 and after deducting the estimated underwriting discounts and commissions.

The information below is illustrative only and our capitalization following the offering will be adjusted based on the actual offering price and other terms of the offering determined at pricing. You should read this table in conjunction with our consolidated financial statements and related notes included in this prospectus as well as the sections titled “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    

As of June 30, 2021

 
(in € thousands, except share and per share data)   

Actual

   

As

Adjusted(1)

 

Cash, cash equivalents and investments(2)

     449,335                         
  

 

 

   

 

 

 

Total debt(3)

     512,858    

Equity

    

Ordinary shares, no par value per share: 164,608,236 shares, actual;              shares, as adjusted

    

Share capital

     164,608    

Additional paid-in capital

     1,033,670    

Accumulated other comprehensive income

     (25,013  

Accumulated deficit

     (320,691  
  

 

 

   

 

 

 

Total shareholders’ equity

     852,574    
  

 

 

   

 

 

 

Total capitalization

     1,365,432    
  

 

 

   

 

 

 

 

(1)

Each $1.00 increase (decrease) in the assumed initial public offering price of $                per ADS, would increase (decrease) each of cash, cash equivalents and investments, additional paid in capital, total shareholders’ equity and total capitalization by approximately €                million, assuming the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions. We may also increase or decrease the number of ADSs we are offering. An increase (decrease) of 1,000,000 in the number of ADSs offered by us would increase (decrease) each of cash, cash equivalents and investments, total equity and total capitalization by approximately €                 million, assuming no change in the assumed initial public offering price and after deducting the estimated underwriting discounts and commissions.

 

(2)

Investments comprise of our investments in liquid instruments, including, among others, corporate bonds or short-term deposits with a maturity of less than three months.

 

(3)

Total debt comprises current and non-current loan liabilities and lease obligations.

The number of our ordinary shares issued and outstanding actual and as-adjusted is based on 164,608,236 ordinary shares outstanding as of June 30, 2021.

 

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DILUTION

If you invest in our ADSs in this offering, your interest will be diluted immediately to the extent of the difference between the initial public offering price per ADS and our as adjusted net tangible book value per ADS after completion of the offering.

Net tangible book value per ADS represents the amount of our total assets less our total liabilities, excluding intangible assets, divided by the number of our ordinary shares outstanding as of June 30, 2021, (based on a ratio of one ADS representing one-half of one ordinary share). As of June 30, 2021, we had a historical net tangible book value of €                million ($                million), corresponding to a net tangible book value per ordinary share of € ($            ) (equivalent to $                per ADS).

After giving effect to the issuance and sale of              ADSs in this offering at an assumed initial offering price of $                per ADS, the U.S. dollar equivalent of the closing price of our ordinary shares on the Frankfurt Stock Exchange of €                 on                     , 2021, at the exchange rate of $                 per euro, multiplied by the ADS-to-share ratio of 2 to 1, and after deducting the estimated underwriting discounts and commissions, our as adjusted net tangible book value as of June 30, 2021 would have been €              million ($                 million), corresponding to a net tangible book value per ordinary share of €                 ($                 ) (equivalent to $                 per ADS). This represents an immediate increase in net tangible book value of €                 ($                 ) per ordinary share (equivalent to $per ADS) to existing shareholders and immediate dilution of $                 per ADS to new investors purchasing ADSs in this offering. Dilution per ADS to new investors is determined by subtracting our as adjusted net tangible book value per ADS from the assumed initial public offering price per ADS paid by new investors.

The following table illustrates this dilution on a per-ADS basis:

 

Assumed initial public offering price per ADS

   $                                  

Historical net tangible book value per ADS as of June 30, 2021

   $         

Increase in net tangible book value per ADS attributable to new investors participating in this offering

   $         

As adjusted net tangible book value per ADS after this offering

   $         

Dilution per ADS to new investors participating in this offering

   $         

Each $1.00 increase (decrease) in the assumed initial offering price of $                 per ADS, would increase (decrease) our as adjusted net tangible book value as of June 30, 2021 by €                ($            ) per ADS, and would increase (decrease) dilution to new investors in this offering by €                ($                ) per ADS, assuming that the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions. An increase (decrease) of 1,000,000 in the number of ADSs offered by us would increase (decrease) our as adjusted net tangible book value after this offering by €                ($                ) per ADS, and would decrease (increase) dilution to investors in this offering by approximately €                ($                ) per ADS, assuming no change in the assumed initial public offering price per ADS and after deducting the estimated underwriting discounts and commissions.

If the underwriters exercise in full their option to purchase additional ADSs, our as adjusted net tangible book value per ADS would be $                 , representing an immediate increase in as adjusted net tangible book value to existing shareholders of $                 per ADS and immediate dilution of $                     per ADS to new investors, assuming no change in the assumed initial public offering price per ADS and after deducting the estimated underwriting discounts and commissions.

The as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing.

 

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The following table sets forth, on an as adjusted basis as of June 30, 2021, after giving effect to the number of ordinary shares owned by existing shareholders and to be owned by new investors purchasing ADSs in this offering, the total consideration paid to us, the average price per ordinary share paid by our existing shareholders and the average price per ADS to be paid by new investors purchasing ADSs in this offering. The calculation below is based on an assumed initial public offering price of $             per ADS, before deducting underwriting discounts and commissions:

 

    

Ordinary Shares
Purchased

   

Total Consideration

   

Average
Price Per
Share

    

Average
Price Per
ADS

 
    

Number

    

Percent

   

Amount

    

Percent

 

Existing shareholders

                           $                    $                

New investors

                                                         
  

 

 

    

 

 

   

 

 

    

 

 

      

Total

        100.0        100.0   $        $    

Each $1.00 increase (decrease) in the assumed initial public offering price of $                 per ADS, would increase (decrease) the total consideration paid by new investors by $                 million and increase (decrease) the percentage of total consideration paid by new investors by approximately    %, assuming that the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same, and before deducting underwriting discounts and commissions. An increase (decrease) of 1,000,000 in the number of ADSs offered by us would increase (decrease) the total consideration paid by investors participating in this offering approximately $             million, and increase (decrease) the percentage of total consideration paid by new investors by approximately     %, assuming no change in the assumed initial public offering price and before deducting underwriting discounts and commissions.

The number of our ordinary shares issued and outstanding actual, and as adjusted is based on 164,608,236 ordinary shares outstanding as of June 30, 2021.

We may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities may result in further dilution to our shareholders.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the information in and our financial statements and related notes included elsewhere in this prospectus. The following discussion is based on our financial information prepared in accordance with the International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB, which may differ in material respects from generally accepted accounting principles in other jurisdictions, including U.S. GAAP. The following discussion includes forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those described in “Risk Factors” and elsewhere in this prospectus. Please also see “Cautionary Note Regarding Forward-Looking Statements.”

Overview

We are an industry-leading drug discovery and development partner for the pharmaceutical and biotechnology industry. Our mission is to discover best and first-in-class medicines for a broad range of difficult to treat diseases in collaboration with our partners. To that end, we have built a comprehensive suite of fully integrated, next generation technology platforms which we believe will transform the way new drugs are discovered. By leveraging the advanced capabilities of our integrated platforms, we are able to provide solutions to our partners that enable significant improvements in the quality of new drugs while accelerating the drug discovery process and reducing the high cost of attrition often associated with traditional drug discovery processes.

We generate revenue primarily through three core collaboration routes: (1) by providing our drug discovery capabilities on a fee-for-service and FTE-rate basis; (2) by receiving milestones and royalties on assets; and (3) by creating value through equity ownership in emerging, highly innovative biotechnology companies and translational academic institutional projects. Contracts with our partners can include elements of one or more of our three core collaboration routes.

We report the results of our operations in two operating segments: EVT Execute and EVT Innovate. EVT Execute includes mainly fee-for-service and FTE-rate arrangements where our customers own the intellectual property, whereas EVT Innovate comprises of internal R&D activities as well as services and partnerships that originate from these R&D activities where we typically own or co-own intellectual property with our strategic partners.

In the future, we expect EVT Innovate to generate more revenue from milestones and royalties as our pipeline assets mature. Revenue generated through our collaboration arrangements may contribute to either the EVT Execute or EVT Innovate segment, depending on the nature of the contract with our customer, the ownership of the intellectual property and the stage of the project. Expenses, such as labor and material expenses, arising from the work on contracts for which the customer owns the intellectual property are recorded as cost of revenues whereas expenses arising from pursuing internal R&D activities are recorded as research and development expenses. Additionally, when entering into customer contracts and partnership agreements based on internal R&D activities, the related costs, such as labor, materials and reimbursable overhead expenses, are also recorded within cost of revenues.

For the six months ended June 30, 2021, we reported €271.3 million in revenue, representing growth of 17.5% from the six months ended June 30, 2020, and €112.7 million in net income, representing an increase from €7.3 million for the six months ended June 30, 2020. We also reported Adjusted EBITDA of €36.2 million for the six months ended June 30, 2021, representing a decrease from €47.3 million for the six months ended June 30, 2020. Adjusted EBITDA is a measure that is not defined under IFRS. For further information about how we calculate Adjusted EBITDA, limitations of its use and its reconciliations to comparable IFRS measures, see “–Key Performance Metrics and Non-IFRS Measures.”

 

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Key Factors Affecting Our Results

Factors affecting our results of operations and financial condition include the factors described below.

Market Demand for External Innovation

Our financial results are impacted by our partners’ and customers’ needs for external innovation through partnering or outsourcing their R&D initiatives and/or highly innovative manufacturing activities and our ability to meet those needs. We will sustain growth only if our existing partners and customers continue to rely on our expertise and capacity and if additional companies select us as their partner of choice for drug discovery and development.

For the past decade, the global pharmaceutical industry has been struggling with declining efficiency in introducing new products to the market. As a result, pharmaceutical companies of all sizes have been and continue to be under pressure to re-evaluate and adjust their business strategies, in particular by accessing innovative technologies such as artificial intelligence and machine learning and pursuing innovative treatment modalities, such as personalized medicine, cell therapy and gene therapy. New companies have been formed to specifically develop these technologies and modalities. Moreover, there is an increased focus on early prediction parameters to determine the success or failure of new drugs. In order to access innovation in a capital efficient manner, industry players increasingly rely on external sources, such as our innovation hub, for innovative R&D and manufacturing expertise and capacity.

We believe that market demand for external innovation will continue to drive demand for our assets and services, facilitate additional collaboration opportunities and potentially improve the volume and terms of partnerships that we are able to secure. We believe this trend will increase the likelihood of strategic, integrated, long-term collaborations and drive our continued growth.

Efficiency and Scientific Excellence of our own R&D Activities

Our performance is dependent not only on the market’s need for external innovation, but also on our own ability to provide innovative solutions. For this reason, investing in technologies and platforms is a core part of our strategy. In 2019 and 2020, we invested €58.4 million and €63.9 million in R&D, respectively, and we intend to continue to dedicate a significant amount of financial resources to ensuring that our offering continues to meet the industry’s needs. During the six months ended June 30, 2021, we invested €35.4 million in R&D.

For example, we are allocating a significant amount of resources to improving our EVOpanOmics and EVOpanHunter platform, our capabilities for AI-driven development of biologics and our iPSC platform. Investments in maintaining and expanding our technological leadership increases our short-term expenses while opening possibilities for future revenue growth.

Scientific Results and Third Party Decisions

An important pillar of our growth strategy is the shift of our business to EVT Innovate and to the generation of milestones and royalties. Our EVT Innovate pipeline currently includes more than 130 assets. We define our pipeline to include candidates that we wholly own and those for which we have the right to receive royalty or milestone payments. Pipeline assets with respect to which we have the right to receive royalty or milestone payments include those that we will have initially developed and subsequently licensed or assigned to partners for continued pre-clinical and clinical development as well as those that have been initially developed by our partners and that have become the subject of a joint research project. We do not count in our pipeline candidates being developed by partners in whom we have solely an equity stake through EVOequity and no right to milestone or royalty payments with respect to their candidates in development.

 

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Our financial results depend on the success of our partners’ clinical development of our pipeline assets, receipt of regulatory approval and commercialization. A partner may choose to end the development of a specific program for scientific or commercial reasons and we typically have no ability to influence such decisions, which may be driven by factors such as pipeline prioritization and the ability to obtain additional required capital. Our future financial results therefore depend, in part, on the judgment and financial health of our partners. We mitigate this risk through diversification in our portfolio.

To the extent that our pipeline assets are recognized on our balance sheet in line with IFRS requirements, impairments directly impacting our results of operations may occur if our expectations for future cash flows change significantly. This may be due to our partners’ decision to discontinue a program for scientific or commercial reasons, or their inability to obtain adequate funding.

Revenue Mix and Gross Margin

We generate revenue either from fee-for-service and/or FTE-rates based contracts, by receiving milestones and royalties on assets or any combination thereof. Revenues can be further differentiated based on our technologies and platforms. Changes in the allocation of revenues between contract types and technologies mainly impacts our cost of sales, gross profit and gross margin.

In each of the year ended December 31, 2020 and the six months ended June 30, 2021, 79%, of our third-party revenues were derived from EVT Execute, which mainly includes fee-for-service and FTE-rates based revenues. In the mid- to long-term, we are focused on generating an increasing share of our revenues from milestones and royalties on our assets. In some cases, especially in our EVT Innovate segment, we enter into contracts with short-term lower FTE rates in exchange for higher financial upside through future milestone or royalty payments. Our strategy is to share the risk and reward and partner our assets as early as possible in the preclinical or development process to subsequently generate substantial medium-term revenues from FTE-based research payments and development milestone payments and long-term revenues from sales milestones and royalties. In the initial discovery and development stage, we do not earn any revenue from these arrangements. In the long-term, however, we expect our gross margin to improve since no significant expenses will be incurred in relation to milestones and royalties because our partners typically absorb the costs of clinical development and commercialization.

Additionally, we have invested in our biologics manufacturing facilities (J.POD®), which, once at full operational capacity in the mid-term, we expect to generate higher gross margins than our existing business.

Acquisitions and Disposals

Strategic acquisitions are part of our strategy for growth and strengthening our competitive position. We continually evaluate the market for attractive opportunities that are accretive to our business. We typically acquire companies that expand our value chain through access to new technologies or additional capacity, extend our offering and value chain, provide access to new customers or allow for extension of our geographical reach.

In July 2019, we completed the acquisition of Just Biotherapeutics, Inc., a U.S.-based technology company that integrates the design, development and manufacturing of biologics. The total consideration was €51.1 million in cash, increased by a possible performance-based component (earn-out) as contingent consideration valued at €3.9 million in cash as of the acquisition date.

In July 2020, we acquired from Sanofi “Biopark by Sanofi,” a real estate company owning and managing the Toulouse site where we had been the major tenant since acquiring Sanofi’s Toulouse-based scientific operations in 2015. The transaction included the transfer of a team of facility-related employees to us, who continue to manage the site. The acquired land and buildings secure additional capacity and flexibility for long-term growth of our operations in Toulouse, France. In April 2021, we announced the planned construction of our second J.POD® facility on the acquired land.

 

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In addition, we have acquired, and may continue to acquire minority stakes in early-stage development companies through our EVOequity program, which is described in further detail in the “Business” section of this prospectus. These companies can either be entities with no prior relationship to us or spin-outs from our other programs, such as our BRIDGEs program. The related transactions may result in significant influence over the acquired entity in line with the IFRS definition presented in IAS 28 (generally 20% or more of voting rights) and therefore require us to account for these investments using the equity method. In this case, in addition to the balance sheet impact, our share of the investee’s profit or loss will impact our results of operations under “share of the result of associates accounted for using the equity method,” but will have no effect on our Adjusted EBITDA. Fair value adjustments of our equity investments that are not accounted for using the equity method also impact our results of operations from time to time. For example, during the six months ended June 30, 2021, we recognized €116.1 million from a re-measurement of Exscientia Ltd. Fair value adjustments of a similar magnitude may or may not occur in the future.

Foreign Currency Exchange Rates

Due to our international business operations, we are subject to both foreign exchange transaction and translation risks. Our reporting currency is the Euro, however, we also incur revenues and expenses in U.S. dollar and pound sterling. Other currencies are of less relevance.

Transactional risk arises when we and our subsidiaries execute transactions in a currency other than our respective functional currency. Our principal exposure to translation effects relates to pound sterling and the U.S. dollar. In 2020, 45% and 14% of our revenue and 17% and 24% of our cost of revenue was in U.S. dollars and pound sterling, respectively. In 2019, 39% and 14% of our revenue and 9% and 26% of our cost of revenue was in U.S. dollars and pound sterling, respectively. For the six months ended June 30, 2021, 46% and 12% of our revenue and 20% and 21% of our cost of revenue was in U.S. dollars and pound sterling, respectively. For the six months ended June 30, 2020, 43% and 15% of our revenue and 16% and 24% of our cost of revenue was in U.S. dollars and pound sterling, respectively.

Where we are unable to match sales received in a foreign currency with expenses paid in the same currency, our results of operations are affected by currency exchange rate fluctuations. We also use derivatives such as currency futures and swaps to mitigate foreign exchange risk.

R&D Tax Credits

We receive R&D tax credits for qualifying research related expenses in France, the United Kingdom, Italy and Germany. The credits are recognized under other operating income. These credits amounted to €25.3 million in 2020 as compared to €28.2 million in 2019. For the six months ended June 30, 2021, these credits amounted to €14.2 million as compared to €11.9 million for the six months ended June 30, 2020.

In general, the R&D tax credit policies in the countries where we operate have been stable in recent years, with some countries expanding their R&D tax credit policies to our benefit. However, there have been recent changes to Italy’s policies that significantly reduced our allowance in 2020 and during the six months ended June 30, 2021 compared to 2019. Due to changes to Italian tax laws, a new tax credit was granted in Italy for which we are eligible starting from June 2021. We have already accrued €0.4 million under the new tax credit as of June 30, 2021. Further changes or full or partial expirations of these programs may affect our future financial performance.

COVID-19 Pandemic

As of the date of this prospectus, the COVID-19 pandemic has had limited adverse impact on our financial results. Overall, in 2020, we exceeded our revenue target, however, revenue from milestone payments declined €13.3 million as our partners experienced delays starting or continuing clinical trials. During the six months ended June 30, 2021, our milestone payments increased by €1.9 million when compared to the same

 

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period in the previous year. Furthermore, the introduction of shiftwork resulted in fewer billable hours and we incurred minor costs related to protective equipment, such as the provision of masks. However, decreases in certain project-related costs from reduced spending on travel, training and conferences, have substantially offset any of the negative impact on our Adjusted EBITDA.

The COVID-19 pandemic stimulated growth in the pharmaceutical and biotechnology sectors, which in turn benefits our company. Like other companies in our industry, we are making contributions to combat COVID-19 through a number of activities. For example, in July 2020, our wholly-owned subsidiary Just—Evotec Biologics received an order from the U.S. Department of Defense for the development and manufacture of monoclonal antibodies (“mAbs”) for the treatment and prevention of COVID-19.

As the COVID-19 pandemic continues, we may remain exposed to the changes and expenses outlined above or face challenges to our business. For more information, see “Risk Factors—COVID 19 has affected and any similar pandemic, epidemic or outbreak of an infectious disease may materially and adversely affect, our business, financial condition, results or operations, cash flows and prospects.”

Key Performance Metrics and Non-IFRS Measures

We review a number of key performance metrics and non-IFRS measures to assess the progress of our business, make decisions about where to allocate time and investments and assess the near-term and longer-term performance of our business. The measures set forth below should be considered in addition to, not as a substitute for or in isolation from, our financial results prepared in accordance with IFRS. The following table sets forth these metrics as of and for the periods presented:

 

    

Years Ended December 31,

   

Change

 
    

2020

   

2019

   

    

%

 
     (In thousands, except number of customers,
number of customers > €1 million revenue, repeat
business)
 

Revenues from contracts with customers

   500,924     446,437     54,487        12.2

Unpartnered R&D expenses

   (46,441   (37,477   (8,964      23.9

Net income

   6,252     37,228     (30,976      (83.2 )% 

Adjusted EBITDA

   106,621     123,143     (16,522      (13.4 )% 

Number of customers

     829       769       60        7.8

Number of customers > €1 million revenue

     86       79       7        8.9

Annual Repeat business

     90     92     —          (2.2 )% 
  

 

 

   

 

 

   

 

 

    

 

 

 

 

    

Six Months Ended June 30,

    

Change

 
    

2021

    

2020

    

    

%

 
     (In thousands, except number of customers, number of
customers > €1 million revenue)
 

Revenues from contracts with customers

   271,302      230,989      40,313        17.5

Unpartnered R&D expenses

   (27,842    (21,562    (6,280      29.1

Net income

   112,717      7,259      105,458        1,452.8

Adjusted EBITDA

   36,188      47,268      (11,080      (23.4 )% 

Number of customers

     626        618        8        1.3

Number of customers > €1 million revenue

     58        47        11        23.4
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues from Contracts with Customers

We recognize revenues in line with the requirements of IFRS 15: “Revenues from Contracts with Customers.” Our revenues from contracts with customers were €500.9 million and €446.4 million in 2020 and 2019, respectively. For the six months ended June 30, 2021 and 2020, our revenues from contracts with customers were €271.3 million and €231.0 million, respectively.

 

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Unpartnered R&D Expenses

We distinguish between partnered and unpartnered R&D. Partnered R&D is where we bear the expenses and are refunded by our partners. Unpartnered R&D is conducted at our own expense, and if successful, we partner such projects through our EVOequity program. We consider unpartnered R&D a measure of our investment in future potential EVT Innovate projects.

Our unpartnered R&D expenses were €46.4 million and €37.5 million in 2020 and 2019, respectively. For the six months ended June 30, 2021 and 2020, our unpartnered R&D expenses were €27.8 million and €21.6 million, respectively.

Net Income

Our net income declined by €31.0 million, or 83.2%, from €37.2 million in 2019 to €6.3 million in 2020. This decrease mainly resulted from a decrease in gross margin from 29.8% to 25.1%, in part as a result of an increase in losses from share of the result of associates accounted for using the equity method in the amount of €8.2 million and as well as an increase in losses from foreign currency exchange in the amount of €8.2 million. Our net income increased by €105.5 million from €7.3 million in the six months ended June 30, 2020 to €112.7 million in the six months ended June 30, 2021. This increase mainly resulted from the fair value adjustment of Evotec’s participation in Exscientia Ltd. in the amount of €116.1 million.

Adjusted EBITDA

We define Adjusted EBITDA as net income (loss) adjusted for interest, taxes, depreciation and amortization of intangibles, impairments on goodwill and other intangible and tangible assets, total non-operating results and change in contingent consideration (earn-out).

Adjusted EBITDA is a non-IFRS measures presented as a supplemental measure of our performance. Adjusted EBITDA should not be considered as an alternative to net income as a measure of financial performance. Adjusted EBITDA is presented because it is a key metric used by our Management Board to assess our financial performance. Management believes Adjusted EBITDA is an appropriate measure of operating performance because it eliminates the impact of expenses that do not relate directly to the performance of the underlying business. Our definition of this non-IFRS financial measure may not be comparable to similarly titled measures of other companies, thereby, reducing the usefulness of our Adjusted EBITDA as a tool for comparison.

Adjusted EBITDA declined by €16.5 million, or 13%, to €106.6 million in 2020 from €123.1 million in 2019, primarily as a result of the expiration in March 2020 of an agreement with Sanofi in relation to the Toulouse site that included revenue bearing services and the reimbursement of certain costs such as administrative expenses. Furthermore, R&D expenses increased and milestone revenues declined in 2020 when compared to 2019 as our partners experienced delays starting or continuing clinical trials as a result of COVID-19. Adjusted EBITDA decreased by €11.1 million, or 23.4%, to €36.2 million for the six months ended June 30, 2021 from €47.3 million for the six months ended June 30, 2020. This decrease was primarily a result of a delay in the payment of milestones, lower gross margin, a negative foreign currency effect of €7.4 million and the end of the Sanofi payments for the Toulouse site which generated €8.6 million of income for the six months ended June 30, 2020.

 

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The following table provides the reconciliation of net income to Adjusted EBITDA for the periods presented below:

 

    

Six Months
Ended June 30,

   

Years Ended
December 31,

 
(In € thousands)   

2021

   

2020

   

2020

   

2019

 

Net income

     112,717       7,259       6,252       37,228  

Interest expense (net)

     3,260       3,376       7,126       5,224  

Tax expense

     1,708       4,565       19,555       19,334  

Depreciation of tangible assets

     22,651       21,216       42,123       36,456  

Amortization of intangible assets

     6,428       7,135       13,937       12,349  
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     146,764       43,551       88,993       110,591  

Impairment of intangible assets

     683       —         3,244       10,272  

Impairment of goodwill

     —         —         —         1,647  

Measurement gains from investments

     (116,148     —         (1,500     (80

Share of the loss of associates accounted for using the equity method

     9,818       3,644       10,434       2,210  

Other income from financial assets, net

     (11     (37     (27     (32

Foreign currency exchange (loss) gain, net

     (3,089     272       6,935       (1,220

Other non-operating income, net

     60       (162     (252     (70

Change in contingent consideration (earn-out)

     (1,889     —         (1,206     (175
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     36,188       47,268       106,621       123,143  
  

 

 

   

 

 

   

 

 

   

 

 

 

Number of Customers

Our number of customers increased by 7.8% from 769 in 2019 to 829 in 2020. Our number of customers increased by 1.3% from 618 for the six months ended June 30, 2020 to 626 for the six months ended June 30, 2021. An entity with multiple subsidiaries, segments, or divisions is defined and counted as a single customer, even if we have separate agreements with multiple subsidiaries, segments, or divisions that are part of the same entity.

Number of Customers Who Contributed More Than €1 million to Our Revenue

The number of customers who contributed more than €1 million to our revenue were 86 and 79 in 2020 and 2019, respectively, and 58 and 47 for the six months ended June 30, 2021 and 2020, respectively.

Our largest customers by revenues, Bristol Meyer Squibb (“BMS”), Merck and Sanofi, collectively accounted for 24% of revenues from contracts with customers in 2020. In 2019, BMS, Merck and Sanofi were also our largest customers by revenue, together contributing 30% to our revenues. The decrease in the percentage of our revenues generated from our three largest customers is a result of revenue growth with other customers and the expiration of the Sanofi agreement for the Toulouse site in March 2020. For the six months ended June 30, 2021, our largest customers by revenues, BMS, Merck and the U.S. Department of Defense (DOD), collectively accounted for 23% of revenues from contracts with customers. For the six months ended June 30, 2020, BMS, Sanofi and Merck were our largest customers by revenue, together contributing 22% to our revenues. The increase in the percentage of our revenues generated from our three largest customers is a result of strong revenue growth with BMS.

Repeat Business

We define annual repeat business as the percentage of revenues with customers who have purchased products and services from us at least once in both the current year and the previous year. We review repeat

 

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business on a yearly basis. Repeat business was 90% and 92% in 2020 and 2019, respectively. We believe our significant amount of repeat business is primarily due to our ability to achieve success and high satisfaction of our partners and customers. The extent to which we generate repeat business from our customers will be an important factor in our continued revenue growth.

Our Operating Segments

The following table details our operating income (loss) and Adjusted EBITDA for the six months ended June 30, 2021 and 2020 for each segment:

 

    

Six Months Ended June 30, 2021

 
    

EVT
Execute

   

EVT
Innovate

   

Intersegment
eliminations

   

Evotec
Group

 
(In € thousands)   

(unaudited)

 

Revenues

     213,998       57,304       —         271,302  

Intersegment revenues

     65,543       —         (65,543     —    

Costs of revenue

     (226,540     (47,965     59,505       (215,000
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     53,001       9,339       (6,038     56,302  

Research and development expenses

     (986     (40,486     6,038       (35,434

Selling, general and administrative expenses

     (37,171     (9,212     —         (46,383

Impairment of intangible assets

     —         (683     —         (683

Other operating income

     12,928       23,251       —         36,179  

Other operating expenses

     (1,561     (105     —         (1,666
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income (expenses)

     (26,790     (27,235     6,038       (47,987
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     26,211       (17,896     —         8,315  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA(1)

     51,886       (15,698     —         36,188  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

    

Six Months Ended June 30, 2020

 
    

EVT
Execute

   

EVT
Innovate

   

Intersegment
eliminations

   

Evotec
Group

 
(In € thousands)   

(unaudited)

 

Revenues

     185,713       45,276       —         230,989  

Intersegment revenues

     51,047       —         (51,047     —    

Costs of revenue

     (180,576     (43,742     46,394       (177,924
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     56,184       1,534       (4,653     53,065  

Research and development expenses

     (2,586     (31,863     4,653       (29,796

Selling, general and administrative expenses

     (29,745     (6,787     —         (36,532

Impairment of intangible assets

     —         —         —         —    

Other operating income

     10,238       24,861       —         35,099  

Other operating expenses

     (2,103     (816     —         (2,919
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income (expenses)

     (24,196     (14,605     4,653       (34,148
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     31,988       (13,071     —         18,917  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA(1)

     58,245       (10,977     —         47,268  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Adjusted EBITDA is defined as net income (loss) adjusted for interest, taxes, depreciation and amortization of intangibles, impairments on goodwill and other intangible and tangible assets, total non-operating results and change in contingent consideration (earn-out). For a reconciliation of Adjusted EBITDA to net income (loss) see “—Key Performance Metrics and Non-IFRS Measures—Adjusted EBITDA.

 

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The following table details our operating income (loss) and Adjusted EBITDA for the years ended December 31, 2020 and 2019 for each segment:

 

    

Year Ended December 31, 2020

 
(In € thousands)   

EVT
Execute

   

EVT
Innovate

   

Intersegment
eliminations

   

Evotec
Group

 

Revenues

     394,094       106,830       —         500,924  

Intersegment revenues

     115,776       —         (115,776     —    

Costs of revenue

     (382,921     (97,606     105,346       (375,181
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     126,949       9,224       (10,430     125,743  

Research and development expenses

     (4,449     (69,926     10,430       (63,945

Selling, general and administrative expenses

     (61,786     (15,452     —         (77,238

Impairment of intangible assets

     —         (3,244     —         (3,244

Other operating income

     20,792       51,383       —         72,175  

Other operating expenses

     (4,177     (791     —         (4,968
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income (expenses)

     (49,620     (38,030     10,430       (77,220
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     77,329       (28,806     —         48,523  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA(1)

     129,281       (22,660       106,621  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

    

Year Ended December 31, 2019

 
(In € thousands)   

EVT
Execute

   

EVT
Innovate

   

Intersegment
eliminations

   

Evotec
Group

 

Revenues

     351,366       95,071       —         446,437  

Intersegment revenues

     82,698       —         (82,698     —    

Costs of revenue

     (324,616     (62,418     73,488       (313,546
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     109,448       32,653       (9,210     132,891  

Research and development expenses

     (2,144     (65,498     9,210       (58,432

Selling, general and administrative expenses

     (52,524     (14,022     —         (66,546

Impairment of intangible assets

     —         (10,272     —         (10,272

Impairment of goodwill

     —         (1,647     —         (1,647

Other operating income

     30,845       45,653       —         76,498  

Other operating expenses

     (8,818     (1,080     —         (9,898
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income (expenses)

     (32,641     (46,866     9,210       (70,297
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     76,807       (14,213     —         62,594  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA(1)

     122,507       636         123,143  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Adjusted EBITDA is defined as net income (loss) adjusted for interest, taxes, depreciation and amortization of intangibles, impairments on goodwill and other intangible and tangible assets, total non-operating results and change in contingent consideration (earn-out). For a reconciliation of Adjusted EBITDA to net income (loss) see “—Key Performance Metrics and Non-IFRS Measures—Adjusted EBITDA.”

In 2021, we implemented changes to our internal management reporting and now allocate amounts for recharges to the segments. We made retrospective restatements to our segment results for the years 2019 and 2020, as well as for the six months ended June 30, 2020.

Components of Results of Operations

Revenues from Contracts with Customers

Revenue from contracts with customers consists mainly of service fees and FTE-based research payments.

 

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We maintain a large portfolio of partnered pipeline assets generating revenues from upfront and milestone payments as well as a number of unpartnered pipeline assets that we are progressing for future partnering. We expect the relative share of revenues from milestones and royalties as a percentage of total revenue to increase as our pipeline matures.

Costs of Revenue

Costs of revenue includes the cost of personnel directly associated with revenue generating projects, facilities and overhead used to directly support those projects, and outsourced services used and materials consumed in the provision of the products or services as well as amortization and depreciation.

R&D Expenses

Our R&D expenses comprise expenses incurred in connection with our in-house discovery platforms and developing new unpartnered pipeline assets as well as overhead expenses for both our partnered and unpartnered R&D projects.

We receive grants and funding from government authorities as well as private foundations for the support of some selected R&D projects. These grants are linked to projects and are recognized as a reduction mainly of R&D expenses when they are received.

We expense our research activities as incurred. Due to the high uncertainty associated with early stage development activities in the pharmaceutical sector, the precondition for the capitalization of development expenses as outlined in IAS 38 is generally not satisfied. Therefore, we have not capitalized internally generated development costs to date.

R&D projects that are acquired in a business combination are capitalized at fair value when those R&D projects are expected to generate probable future economic benefits to our business. R&D costs acquired in a business combination are not amortized until they are sustainably generating benefits.

We expect R&D expenses to continuously increase for the foreseeable future as our current pipeline progresses and we develop new pipeline assets.

Selling, General and Administrative Expenses

Our selling expenses mainly consist of personnel costs (including share-based compensation), social security, travel costs and consultancy expenses of our business development team. General and administrative expenses primarily consist of personnel related costs (including share-based compensation) for procurement and logistics, finance, legal, human resources, information technology, investor relations, risk management and other administrative functions, professional fees, accounting and legal services and facility costs related to space used by the support functions. These costs relate to the day-to-day administrative operation of the business and are unrelated to the R&D of any individual asset.

Following the completion of this offering, we expect to incur additional expenses as a result of being listed on a U.S. securities exchange and costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, including third party and internal resources related to SOX compliance. As a result, we expect the amount of our selling, general and administrative expense to increase for the foreseeable future.

Impairment of Intangible Assets and Goodwill

Impairment of intangible assets and impairment of goodwill consist of the losses resulting from the differences between the carrying amount of related assets and their recoverable amount, which is the higher of

 

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the asset’s fair value less cost to sell or value in use. An impairment of goodwill may occur in case the expected performance of the underlying cash-generating unit falls below the expectation at the time of the acquisition of the relevant business. Impairments of intangible assets typically occur when scientific programs do not meet expectations in terms of scientific results or timelines for partnering, thereby impacting expectations for future cash flows.

Other Operating Income

Other operating income mainly consists of tax credits received from tax incentive programs in the context of qualifying R&D expenses in different jurisdictions and refunds from third parties for cost charges.

Tax credits can regularly be partially or fully offset from tax payments to fiscal authorities. We account for income from such R&D tax credit programs as other operating income instead of offsetting them from income tax expenses.

In addition, we recharge current costs incurred at the Toulouse and ID Lyon sites to Sanofi in connection to our agreements signed in 2015 and 2018, respectively. The Toulouse agreement ended in March 2020, while the ID Lyon agreement will continue until June 2023. The Toulouse site agreement included the reimbursement of certain costs related to administrative expenses and rent expenses which were recognized under other operating expenses. For the Lyon site agreement, Sanofi agreed to license to us most of its infectious disease research and early-stage development portfolio and transfer its infectious disease research unit to us, in addition to providing significant mid-term funding to ensure support and progression of the portfolio for which it retained certain option rights on the development, manufacturing, and commercialization of anti-infective products. We recognize these amounts in other operating income when they are a direct reimbursement of costs. There is no underlying direct exchange of these services for this income and therefore a recognition as revenue is not suitable. The related expenses are recognized under R&D expenses.

Other Operating Expenses

Our current other operating expenses mainly consist of the expenses that we recharge to our partners for specific projects, such as the Toulouse agreement. These expenses include facility costs, consultancy expenses, personnel costs and incidental wage costs; outsourced services, materials consumed and depreciation. The related income is recognized under other operating income.

Interest Income and Expenses

Interest income consists of interest accrued or paid on cash deposits and short-term investments as well as other financial instruments.

Interest expenses consist primarily of interest from our Euro denominated short term and long terms loans and promissory notes. A small portion of our finance expenses are related to interest expense on our revolving credits, which we utilize at certain points in the year as needed. Interest expenses also arise from our lease obligations according to IFRS 16 as well as for the unwind of discounts of our earn-out liabilities.

Measurement gains from Investments

Our measurement gains from investments includes fair value adjustments for investments measured in accordance with IFRS 9.

Share of the Result of Associates Accounted for Using the Equity Method

Share of the result of associates accounted for using the equity method consists of our participation in the profits or losses generated as well as fair value differences where applicable.

 

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Foreign Currency Exchange Gain (Loss), Net

Our business and reported profitability are affected by fluctuations in foreign exchange rates mainly between the U.S. dollar, pound sterling and the Euro. A strengthening/weakening of these currencies as compared to each other and against other currencies, leads to foreign currency exchange gains or losses in our consolidated income statement.

Tax Income (Expense)

Tax income (expense) represents the tax charge or credit on our profit or loss for the year and includes both current and deferred taxation. Tax income (expense) is recognized in the income statement unless it relates to items recognized directly in equity, when it is recognized through the statement of comprehensive income. Deferred tax income (expense) consists of the tax impact of tax loss carryforwards and temporary differences. In the future, we expect to continue to benefit from certain tax loss carryforwards as we have incurred negative income in certain group entities including Evotec SE in the past, which is discussed in more detail under “Comparison of the Years Ended December 31, 2020 and 2019—Income and deferred taxes” below. We expect our income taxes to continue to increase on an absolute Euro basis as we continue to grow.

Comparison of the Six Months Ended June 30, 2021 and 2020

The following table summarizes our consolidated statements of operations for each period presented:

 

    

Six Months Ended
June 30,

   

Variance

 
   2021     2020         %  
(In € thousands)    (unaudited)  

Revenues from contracts with customers

     271,302       230,989       40,313       17.5  

Costs of revenue

     (215,000     (177,924     (37,076     20.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     56,302       53,065       3,237       6.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Research and development expenses

     (35,434     (29,796     (5,638     18.9  

Selling, general and administrative expenses

     (46,383     (36,532     (9,851     27.0  

Impairment of intangible assets

     (683     —         (683     (100.0

Other operating income

     36,179       35,099       1,080       3.1  

Other operating expenses

     (1,666     (2,919     1,253       (42.9

Operating income (loss)

     8,315       18,917       (10,602     (56.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest income and expense

     (3,260     (3,376     116       (3.4

Measurement gains from investments

     116,148       —         116,148       100.0  

Share of the result of associates accounted for using the equity method

     (9,818     (3,644     (6,174     169.4  

Other income from financial assets

     11       37       (26     (70.3

Foreign currency exchange gain (loss), net

     3,089       (272     3,361       1,235.7  

Other non-operating income (expense), net

     (60     162       (222     (137.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before tax

     114,425       11,824       102,601       867.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     (3,432     (4,427     995       (22.5

Deferred tax income (expense)

     1,724       (138     1,862       (1,349.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     112,717       7,259       105,458       1,452.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenues from Contracts with Customers

Revenues from contracts with customers increased by €40.3 million, or 17.5%, from €231.0 million for the six months ended June 30, 2020 to €271.3 million for the six months ended June 30, 2021. The increase is

 

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mainly due to a positive performance across all business lines as well as the higher contribution of Just – Evotec Biologics of € 6.7 million for the six months ended June 30, 2021.

Revenues from milestone payments increased by €1.9 million, or 85.9%, from €2.2 million for the six months ended June 30, 2020 to €4.1 million for the six months ended June 30, 2021. Milestone revenues in the first half of 2021 were recognized from a number of collaborations from both business segments.

Foreign exchange rate fluctuations had a negative impact on our revenues by €11.5 million for the six months June 30, 2021 when compared to the prior year period. Revenues from recharges of materials increased to €15.5 million for the six months ended June 30, 2021 from €9.2 million for the six months ended June 30, 2020.

Total revenues in the EVT Execute segment increased by €42.8 million, or 18.1%, from €236.8 million for the six months ended June 30, 2020 to €279.5 million for the six months ended June 30, 2021 due to a strong performance in fee-for-service and FTE revenue business, including a contribution of €23.0 million by Just – Evotec Biologics. This increase included a €14.5 million increase in intersegment revenues (revenues for services performed by EVT Execute for projects accounted for within EVT Innovate) which were €65.5 million and €51.0 million for the six months ended June 30, 2021 and 2020, respectively. The increase in intersegment revenues of 28.4% resulted from the support of EVT Innovate’s growth in external collaborations as well as internal R&D projects. Milestone revenues amounted to €1.8 million and €2.2 million for the six months ended June 30, 2021 and 2020, respectively.

Revenues in the EVT Innovate segment increased by €12.0 million, or 26.6%, from €45.3 million for the six months ended June 30, 2020 to €57.3 million for the six months ended June 30, 2021. The increase is mainly due to higher revenues from our collaborations of €10.0 million, primarily with BMS, Sanofi, Chinook and CureXsys. Milestone payments in the EVT Innovative segment totalled €2.3 million for the six months ended June 30, 2021. There was no milestone payment for the six months ended June 30, 2020.

Costs of Revenue

Costs of revenue increased by €37.1 million, or 20.8%, from €177.9 million for the six months ended June 30, 2020 to €215.0 million for the six months ended June 30, 2021. The increase in Costs of revenue is mainly volume-driven and due to capacity build-up ahead of the launch of J.POD® 1 US facility in Redmond, U.S. Gross margin decreased to 20.8% for the six months ended June 30, 2021 from 23.0% for the six months ended June 30, 2020 primarily in connection with start-up costs for the J.POD® 1 US facility, a low level of milestones revenues, negative effects from foreign exchange rate fluctuations in the amount of €7.7 million and the end of payments from Sanofi for the Toulouse site which contributed €8.6 million during the six months ended June 30, 2020.

Costs of revenue in the EVT Execute segment increased by €46.0 million, or 25.5%, from €180.6 million for the six months ended June 30, 2020 to €226.5 million for the six months ended June 30, 2021. Gross margin decreased from 23.7% for the six months ended June 30, 2020 to 19.0% for the six months ended June 30, 2021. The gross margin in the first six months of 2021 was mainly a result of the capacity build-up prior to the start of decrease in J.POD® 1 US, the loss of Sanofi revenues for the Toulouse site and adverse foreign exchange movements.

Costs of revenue in the EVT Innovate segment increased disproportionately to revenues by €4.2 million, or 9.7%, from €43.7 million for the six months ended June 30, 2020 to €48.0 million for the six months ended June 30, 2021. Gross margin increased from 3.4% for the six months ended June 30, 2020 to 16.3% for the months ended June 30, 2021. The increase in the gross margin is mainly impacted by the €2.3 million in milestone contributions and the composition of higher margin projects in the first six months of 2021.

 

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R&D Expenses

R&D expenses increased by €5.6 million, or 18.9%, from €29.8 million for the six months ended June 30, 2020 to €35.4 million for the six months ended June 30, 2021. In particular, the increase is due to higher expenses for proprietary EVT Innovate projects, including QRbeta. Proprietary projects in the EVT Innovate segment accounted for 87.1% and 77.6% of total R&D expenses for the six months ended June 30, 2021 and June 30, 2020, respectively. The indirect expenses consist of overhead expenses and are not specifically allocated to the sub-project areas. Indirect expenses represented 8.7% and 15.1% of the total R&D expenses for the six months ended June 30, 2021 and June 30, 2020, respectively. No single project represented more than 8.1% of total R&D expenses in the periods presented, and therefore we are presenting our expenses by therapeutic category and platform.

The following table presents our R&D expenses by category for the periods shown:

 

    

Six Months Ended June 30,

   

% of total R&D expenses

 
(In € thousands)        2021             2020             2021             2020      

Neuroscience & Pain

     (4,336     (3,306     12.2     11.1

Oncology

     (5,183     (4,495     14.6     15.1

Metabolic Diseases

     (4,590     (3,951     13.0     13.3

Inflammation & Immunology

     0       0       0.0     0.0

Virology

     (1,760     (1,900     5.0     6.4

Anti-Bacterial

     (4,044     (4,350     11.4     14.6

Global Health

     (1,481     (673     4.2     2.3

Innovate Platform R&D

     (9,487     (4,463     26.8     15.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Proprietary innovative projects expenses

     (30,880     (23,136     87.1     77.6

Biologics

     (227     (1,887     0.6     6.3

Gene Therapy

     (535     0       1.5     0.0

Other

     (699     (260     2.0     0.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Platform R&D expenses

     (1,461     (2,147     4.1     7.2

Overhead expenses

     (3,093     (4,513     8.7     15.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total R&D expenses

     (35,434     (29,796     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

thereof:

        
  

 

 

   

 

 

   

 

 

   

 

 

 

Partnered R&D expenses

     (7,592     (8,234     21.4     27.6

Unpartnered R&D expenses

     (27,842     (21,562     78.6     72.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Unpartnered R&D expenses increased by €6.3 million, or 29.1%, from €21.6 million for the six months ended June 30, 2020 to €27.8 million for the six months ended June 30, 2021. The increase is mainly due to the increased research investments into IPSC projects, QRbeta, global health projects and several other platform projects of EVT Innovate.

R&D expenses for partnered assets slightly decreased to €7.6 million for the six months ended June 30, 2021 from €8.2 million for the six months ended June 30, 2020 as the portion of global health projects funded by partners decreased in comparison to the prior year period.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by €9.9 million, or 27%, from €36.5 million for the six months ended June 30, 2020 to €46.4 million for the six months ended June 30, 2021, primarily due to higher personnel related expenses, IT expenses and depreciation expenses. Personnel related expenses increased from €22.5 million for the six months ended June 30, 2020 to €30.5 million for the six months ended June 30, 2021, in line with our growth in headcount. Furthermore, IT costs increased by €0.6 million from €2.8 million for

 

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the six months ended June 30, 2020 to €3.4 million for the six months ended June 30, 2021, due to an increase in investments in IT systems, infrastructure and security. Additionally, higher depreciation in the amount of €12.5 million and €10.4 million was recognized for the six months ended June 30, 2021 and 2020, respectively, as a result of higher capital expenditures for infrastructure measures at various sites and due to rights of use relating to the new building for J.POD® 1 US. Furthermore, General and Administrative expenses of €1.1 million for the six months ended June 20, 2021 resulted from new strategic initiatives related to proposed financing options and the construction of the J.POD® 2 EU in Toulouse in France.

The increase was partially offset by a decrease in consultancy expenses, travel and training expenses and temporary staff expenses. Consultancy expenses decreased by €0.4 million from €5.1 million for the six months ended June 30, 2020 to €4.7 million for the six months ended June 30, 2021. This decrease was due to a decrease in consultancy for software projects and M&A. Travel and training expenses decreased by €0.3 million due to pandemic-related restrictions. Furthermore, we reduced our expenses for temporary administrative staff by €0.3 million.

Impairment of Intangible Assets

Impairment of intangible assets amounted to €0.7 million for the six months ended June 30, 2021 and there was no impairment for the six months ended June 30, 2020. The Impairment loss for the six months ended June 30, 2021 as a result of reduced pre-clinical activity related to technology developed in the EVT Innovate segment which was acquired in previous years.

Other Operating Income

Other operating income increased by €1.1 million, or 3.1%, from €35.1 million for the six months ended June 30, 2020 to €36.2 million for the six months ended June 30, 2021. This increase was primarily due to a release of earn-out accruals in the amount of €2.1 million as well as €2.3 million higher R&D tax credits mostly in France and UK and the new scheme in Italy.

Cost reimbursement from Sanofi for the ID Lyon site remained consistent with a slight decrease and were €18.6 million and €18.8 million for the six months ended June 30, 2021 and 2020, respectively.

Other Operating Expenses

Other operating expenses decreased by €1.3 million, or 42.9%, from €2.9 million for the six months ended June 30, 2020 to €1.7 million for the six months ended June 30, 2021. This decrease was primarily due to the expiration of the Sanofi collaboration for the Toulouse site in March 2020.

Interest Income and Expense

Interest income and expense remained consistent at €3.3 million for the six months ended June 30, 2021 compared to €3.4 million for the six months ended June 30, 2020.

Measurement Gains from Investments

Measurement gains from investments was €116.1 million for the six months ended June 30, 2021 and arose from the investment in Exscientia Ltd. There was no measurement gain from investments for the six months ended June 30, 2020. Exscientia Ltd. completed two significant financing rounds in the first half of 2021, in which Evotec did not participate. As a result, our shareholding declined from 20.23% to 14.84%. As a consequence of the dilution of our ownership percentage, the investment in Exscientia Ltd. is no longer accounted for using the equity method, but is measured at fair value in accordance with IFRS 9. This change in accounting resulted in a fair value adjustment of €116.1 million.

 

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Share of the Result of Associates Accounted for using the Equity Method

Share of the result of associates accounted for using the equity method increased by €6.2 million, or 169.4%, from €3.6 million for the six months ended June 30, 2020 to €9.8 million for the six months ended June 30, 2021, reducing net income in both periods. This increase was primarily due to net losses from our new equity investments CureXsys and Dark Blue in the amount of €1.2 million and €0.7 million, respectively. For the six months ended June 30, 2020, we recognized €3.9 million of gains from equity investments from NephThera through the difference between the acquisition cost and fair value of the identified assets and liabilities of the investment. No gains from equity investments were recognized during the first six months of 2021.

Foreign Currency Exchange Gain (Loss), net

Foreign currency exchange gains were €3.1 million for the six months ended June 30, 2021 and foreign currency exchange losses were €0.3 million for the six months ended June 30, 2020. The change in foreign exchange gains and losses for the six months ended June 30, 2021 was a result of the weakened Euro against the pound sterling.

Income and Deferred Taxes

Income and deferred tax expenses decreased by €2.9 million from €4.6 million for the six months ended June 30, 2020 to €1.7 million for the six months ended June 30, 2021. As a result of a temporary difference on measurement gains on investments which were offset by previously unrecognized tax loss carryforwards, the effective tax rate significantly decreased compared to the prior year.

We recognize deferred tax assets to the extent that it is probable that future taxable income will be available against which the deductible temporary differences, unused carry forward tax losses and unused tax credits can be utilized. This judgment is made annually and based on budgets and business plans.

 

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Comparison of the Years Ended December 31, 2020 and 2019

The following table summarizes our consolidated statements of operations for each period presented:

 

    

Year Ended
December 31,

   

Variance

 
  

2020

   

2019

   

   

%

 

(In € thousands)

        

Revenues from contracts with customers

     500,924       446,437       54,487       12.2  

Costs of revenue

     (375,181     (313,546     (61,635     19.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     125,743       132,891       (7,148     (5.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Research and development expenses

     (63,945     (58,432     (5,513     9.4  

Selling, general and administrative expenses

     (77,238     (66,546     (10,692     16.1  

Impairment of intangible assets

     (3,244     (10,272     7,028       (68.4

Impairment of goodwill

     —         (1,647     1,647       (100.0

Other operating income

     72,175       76,498       (4,323     (5.7

Other operating expenses

     (4,968     (9,898     4,930       (49.8

Operating income (loss)

     48,523       62,594       (14,071     (22.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

     1,339       2,232       (893     (40.0

Interest expense

     (8,465     (7,456     (1,009     13.5  

Measurement gains from investments

     1,500       80       1,420       1,775.0  

Share of the result of associates accounted for using the equity method

     (10,434     (2,210     (8,224     372.1  

Other income from financial assets

     70       32       38       n.m  

Other expense from financial assets

     (43     —         (43     n.m  

Foreign currency exchange gain (loss), net

     (6,935     1,220       (8,155     (668.4

Other non-operating income

     683       234       449       n.m  

Other non-operating expense

     (431     (164     (267     n.m  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before tax

     25,807       56,562       (30,755     (54.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     (12,065     (12,628     563       (4.5

Deferred tax expense

     (7,490     (6,706     (784     11.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     6,252       37,228       (30,976     (83.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenues from Contracts with Customers

Revenues from contracts with customers increased by €54.5 million, or 12.2%, from €446.4 million in 2019 to €500.9 million in 2020. The increase is mainly due to the organic growth of our ongoing business from fee-for-service and FTE-rate based research services in the amount of €64.0 million and the full year revenue contribution from Just—Evotec Biologics in the amount of €39.3 million. Revenue contribution from Just—Evotec Biologics was €16.1 million in 2019, as we closed the acquisition in July 2019. This increase was partially offset by lower billable FTE hours as a result of a transition to shift-work due to the COVID-19 pandemic, lower milestone payments totaling €13.3 million and the cessation of payments from Sanofi for the Toulouse site subsequent to March 2020, resulting in an €18.0 million reduction of revenues in 2020.

Revenues from milestone and license payments decreased by €15.2 million, or 47.0%, from €32.3 million in 2019 to €17.1 million in 2020 primarily due to delays in milestones, in part due to our partners’ inability to start or continue clinical trials during the COVID-19 pandemic.

In addition, foreign exchange rate fluctuations had a negative impact on our revenues by €6.8 million in 2020.

 

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Revenues from recharges of materials were €21.8 million and €14.5 million for the years ended December 31, 2020 and 2019, respectively. This revenue is not allocated to any segment for the years ended December 31, 2020 and 2019.

Revenues increased in 2020 mainly due to an increase in our EVT Execute segment. Total revenues in the EVT Execute segment increased by €75.8 million, or 17.5%, from €434.1 million in 2019 to €509.9 million in 2020. In particular, EVT Execute revenues from external customers increased in the amount of €31.5 million and includes revenues from recharges of materials and foreign exchange rate fluctuations. Revenues from Sanofi for the Toulouse site, which were mainly attributable to EVT Execute decreased by €16.3 million as compared to 2020 due to the expiration of our collaboration with Sanofi. EVT Execute revenues also included a full year of revenue contributions from Just—Evotec Biologics in 2020 (€39.3 million versus € 16.1 million in the previous year), and revenue from Evotec GT (Gene Therapy) subsequent to its launch in April 2020 (€4.4 million). The increase in EVT Execute revenues also included a €33.1 million increase in intersegment revenues (revenues for services performed by EVT Execute for projects accounted for within EVT Innovate) which totalled €115.8 million and €82.7 million in 2020 and 2019, respectively. The 40% increase in intersegment revenues resulted from the support of EVT Innovate’s growth in external collaborations as well as internal R&D projects.

Revenues in the EVT Innovate segment increased by €11.8 million, or 12.4%, from €95.1 million in 2019 to €106.8 million primarily as a result of higher project revenue from the ID Lyon site in the amount of €5.6 million and additional revenues from the area of kidney diseases (a joint venture with Vifor Pharma called NephThera) in the amount of €6.6 million. An additional increase in revenues in the amount of €16.3 million was driven by several other EVT Innovate collaborations. Milestone achievements in the EVT Innovative segment decreased to €12.0 million in 2020 from €25.2 million in 2019, due to the COVID-19 related delays in milestone achievements. License revenues decreased by €1.9 million in comparison to 2019.

Costs of Revenue

Costs of revenue increased by €61.6 million, or 19.7%, from €313.5 million in 2019 to €375.2 million in 2020. The increase resulted from a €42.1 million from overall growth, with €3.0 million from higher FTE usage and expenses for certain collaborations within our EVT Innovate segment and from €14.9 million resulting from the ramp-up and first full year of consolidation of the sites in Seattle and Redmond of Just—Evotec Biologics. The remainder resulted from higher amortization costs of €1.6 million.

Revenues from fee-for-service and FTE-rates based research services increased disproportionately in comparison to milestone revenues, Milestone revenue was €13.3 million lower in 2020 compared to 2019. In addition, payments of €18.0 million from Sanofi for the Toulouse site ceased in April 2020. As a result of these factors, gross margin decreased to 25.1% in 2020 from 29.8% in 2019.

Costs of revenue in the EVT Execute segment increased by €58.3 million, or 18.0%, from €324.6 million in 2019 to €382.9 million in 2020. The increase resulted mainly from the overall company growth and the ramp-up of the sites in Seattle and Redmond of Just—Evotec Biologics. In addition, amortization of intangible assets resulting from purchase price allocations from the acquisitions of Aptuit and Just Biotherapeutics are also recognized as costs of revenue. Gross margin decreased slightly from 25.2% in 2019 to 24.9% in 2020.

Costs of revenue in the EVT Innovate segment increased by €35.2 million, or 56.4%, from €62.4 million in 2019 to €97.6 million as a result of higher expenses for certain collaborations with future upside potentials in milestones and royalties. As a result of this, as well as lower revenues from milestone achievements and foreign exchange fluctuation, gross margin decreased from 34.3% in 2019 to 8.6%.

R&D Expenses

R&D expenses increased by €5.5 million, or 9.4%, from €58.4 million in 2019 to €63.9 million in 2020.

 

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In particular, the increase is due to higher expenses for proprietary innovative projects, including the development of new platforms within the EVT Innovate segment such as QRBeta, PanHunter, PanOmics and AutobahnLabs. Related expenses increased from €50.0 million in 2019 to €51.0 million in 2020. Our proprietary innovative projects accounted for 79.7% and 85.6% of total R&D expenses for the years ended December 31, 2020 and 2019, respectively. No single project comprised more than 8.1% of total R&D expense for the six months ended June 30, 2021, compared to 4.7% in 2020 and 5.7% in 2019. The cost of internal R&D platform activities of Just—Evotec Biologics increased from €1.4 million in 2019 to €2.7 million in 2020. Indirect expenses (consisting of overhead expenses not specifically allocated to projects) increased from €6.4 million in 2019 to €9.3 million in 2020, primarily due to expenses incurred in connection with infectious disease projects. Indirect expenses represented 14.6% and 11.0% of the total R&D expenses for the years ended December 31, 2020 and 2019, respectively.

The following table presents our R&D expenses by category for the periods shown:

 

    

Year Ended December 31,

   

% of total R&D expenses

 
(In € thousands)   

    2020    

   

    2019    

   

    2020    

   

    2019    

 

Neuroscience & Pain

     (7,504     (6,636     11.7     11.4

Oncology

     (7,773     (9,462     12.2     16.2

Metabolic Diseases

     (8,767     (11,058     13.7     18.9

Inflammation & Immunology

     0       (133     0.0     0.2

Virology

     (3,938     (8,171     6.2     14.0

Anti-Bacterial

     (9,551     (9,866     14.9     16.9

Global Health

     (1,675     (2,082     2.6     3.6

Innovate Platform R&D

     (11,766     (2,628     18.4     4.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Proprietary innovative projects expenses

     (50,974     (50,035     79.7     85.6

Biologics

     (2,693     (1,440     4.2     2.5

Gene Therapy

     0       0       0.0     0.0

Other

     (943     (553     1.5     0.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Platform R&D expenses

     (3,636     (1,993     5.7     3.4

Overhead expenses

     (9,335     (6,403     14.6     11.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Total R&D expenses

     (63,945     (58,432     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

thereof:

        
  

 

 

   

 

 

   

 

 

   

 

 

 

Partnered R&D expenses

     (17,504     (20,955     27.4     35.9

Unpartnered R&D expenses

     (46,441     (37,477     72.6     64.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Unpartnered R&D expenses increased to €46.4 million in 2020 from €37.5 million in 2019 as a result of higher expenditures for proprietary assets and platform projects.

R&D expenses for partnered assets declined to €17.5 million in 2020 from €20.9 million in 2019. Partnered R&D expenses are fully assigned to EVT Innovate and refunds by our research partners in respect of such expenses are recorded under Other operating income. The decrease is mainly related to the infectious diseases portfolio of the ID Lyon site generating less project related costs that are reimbursable by our partner Sanofi.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by €10.7 million, or 16.1%, from €66.5 million in 2019 to €77.2 million in 2020, primarily due to higher personnel related expenses, IT expenses and acquisition related expenses. Personnel related expenses increased by €5.9 million in 2020 from €38.3 million in 2019 to €44.2 million in 2020, mainly due to continued growth in employee headcount in all areas. Furthermore, IT costs

 

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and license costs increased by €1.6 million from €4.4 million in 2019 to €6.0 million in 2020, due to an increase in personnel and higher license costs in connection with a new ERP program.

Additionally, Just—Evotec Biologics, Evotec GT and Biopark by Sanofi SAS joined the Group in July 2019, April 2020 and July 2020, respectively. These three entities contributed €6.7 million in 2020 and Just—Evotec Biologics contributed €1.9 million in 2019 to the Group’s growing selling, general and administrative expenses.

The increase was partially offset by a decrease in consultancy expenses in the amount of €2.1 million from €10.2 million in 2019 to €8.1 million in 2020, as a result of decreased software and M&A related consultancy expenses.

Impairment of Intangible Assets and Goodwill

Impairment of intangible assets decreased by €7.0 million, or 68.4%, from €10.3 million in 2019 to €3.2 million in 2020. Impairment losses in 2020 were related to the rights to future share in revenues of Haplogen GmbH, Vienna. Due to the fact that Haplogen GmbH lost a significant financing partner and the further development of the underlying projects was no longer assured, we conducted an impairment analysis, which resulted in €3.2 million impairment. Impairment losses in 2019 were related to the developed technologies obtained from the acquisition of Renovis Inc., San Francisco. The program was terminated in the second quarter of 2019 and the related technologies were fully written down in the amount of €10.3 million.

Impairment losses from goodwill were €1.6 million in 2019. The impairment of developed technologies from the acquisition of Renovis Inc. led to a triggering event to test the goodwill in the cash-generating unit of Evotec (US) Innovate for impairment. As a result of this test, the goodwill attributable to Evotec (US) Innovate of €1.6 million was fully impaired.

Impairment losses for both years were all allocated to the EVT Innovate segment.

Other Operating Income

Other operating income decreased by €4.3 million, or 5.7%, from €76.5 million in 2019 to €72.2 million in 2020. This decrease was primarily due to lower amount of R&D tax credits accounted for in 2020 in the amount €25.3 million as compared to €28.2 million recorded in 2019 due to change in legislation in Italy, partly off-set by increased R&D tax credits in France, the United Kingdom and, as of 2020, Germany.

Cost reimbursement from Sanofi for the ID Lyon site amounted to €39.8 million in 2020 compared to €37.2 million in 2019. Cost reimbursement from Sanofi for the Toulouse site decreased to €4.7 million in 2020 compared to €7.6 million in 2019 as a result of the expiration of the agreement in March 2020.

Other Operating Expenses

Other operating expenses decreased by €4.9 million, or 49.8%, from €9.9 million in 2019 to €5.0 million in 2020. This decrease was primarily due to the expiration of the Sanofi collaboration for the Toulouse site in March 2020, for which the other operating expenses for the Toulouse site were €7.5 million in 2019 but only €2.0 million in 2020.

Interest Income

Interest income decreased by €0.9 million, or 40%, from €2.2 million in 2019 to €1.3 million in 2020. Despite the higher overall cash position from October 2020, interest income decreased due to low or negative interest rates on cash deposits and short-term investments in 2020 when compared to 2019 and the phasing out of more interest bearing investments.

 

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Interest Expense

Interest expense increased by €1.0 million, or 13.5%, from €7.5 million in 2019 to €8.5 million in 2020. This increase was partially due to a €0.5 million increase in interest expense from lease liabilities and due to an increase in interest expenses from bank loans and unwinding of discounts of earn-out liabilities.

Measurement Gains from Investments

Measurement gains from investments increased by €1.4 million, from €80 thousand in 2019 to €1.5 million in 2020. This increase resulted from fair value increases of long-term investments in 2020.

Share of the Result of Associates Accounted for using the Equity Method

Share of the result of associates accounted for using the equity method increased by €8.2 million, or 372.1%, from €2.2 million in 2019 to €10.4 million in 2020, reducing net income in both years. This increase was primarily due to increased net losses from, and greater ownership in, Exscientia Ltd. and Breakpoint Therapeutics GmbH in the amount of €2.2 million and €8.0 million, respectively, offset by €2.0 million net income from Nephtera GmbH and other insignificant investments.

Foreign Currency Exchange Gain (Loss), net

Foreign currency exchange losses were €6.9 million in 2020 and foreign currency exchange gains were €1.2 million in 2019. The change in foreign exchange gains and losses in 2020 was a result of the declining U.S. dollar and pound sterling exchange rates against the Euro by approximately 9% and 5%, respectively, through the year.

Income and Deferred Taxes

Income and deferred tax expense remained consistent, slightly increasing to €19.6 million for the year ended December 31, 2020 compared to €19.3 million for the year ended December 31, 2019. The primary impact on the increase in the effective tax rate between 2020 and 2019 resulted from the tax effect of a contribution-in-kind of certain intangible assets. Evotec International bought shares of NephThera GmbH and part of the purchase price was paid by giving access to a self-developed intangible asset. This contribution was considered under the local tax regime as an asset, but was not recognized as such for statutory reporting purposes. The effective tax rate was also impacted by the lack of recognition of certain deferred tax assets on loss-making entities.

We recognize deferred tax assets to the extent that it is probable that future taxable income will be available against which the deductible temporary differences, unused carry forward tax losses and unused tax credits can be utilized. This judgment is made annually and based on budgets and business plans.

Liquidity and Capital Expenditures

We have historically funded our operations primarily through cash received in the ongoing operation of our business, from equity financing through private placements, and from the issuance of promissory notes or the incurrence of bank debt. Cash and cash equivalents are invested in accordance with our investment policy, primarily with a view to maintaining principal flexibility, liquidity and capital preservation, and consist primarily of cash in banks and on hand, fixed deposits and short-term deposits with an original maturity of three months or less. As of June 30, 2021, we had cash and cash equivalents of €382.3 million and short-term investments (corporate bonds and time deposits with maturities less than three months) of €67.0 million. As of June 30, 2021, 64.8% of our cash, cash equivalents and investments were held in Germany, of which 62.3%, 35.2% and 2.5% were in Euros, U.S. dollars and pound sterling, respectively. 35.2% of our cash, cash equivalents and investments were held outside of Germany, of which 28.9% were held in France, mainly in Euros, 22.6% in Italy, mainly in

 

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Euros and U.S. dollars, 24.6% were held in the United Kingdom mainly in pound sterling, 23.2% in the United States, mainly in U.S. dollars and 0.6% were held in other countries. We expect that the net proceeds from the offering, together with our existing cash and cash equivalents, will enable us to fund our operating expenses, capital expenditure requirements and equity portfolio engagements for at least the next 12 months.

We have two loan facilities in the amount of €5.0 million and €10.0 million repayable in 2021 and with interest rates of 1.28% and 1.20%, respectively. Our total unused credit line amount is €50.0 million as of June 30, 2021. Covenant compliance is certified quarterly and as of June 30, 2021, we met all covenants under these various loan agreements. We do not have any secured loans.

In June 2019, we successfully issued promissory notes in an aggregate principal amount of €250.0 million. The promissory notes have fixed and variable interest rates (average below 1.5%) and have 3, 5, 7, and 10 year maturities.

We provided convertible loans in the amount of $2.0 million in May 2020 and $5.0 million in November 2020 as interim financing to our equity investee Celmatix with interest rates of 8.0% and 8.0%, respectively. Additionally, we provided a convertible loan in the amount of €2.3 million as interim financing for our equity investee Eternygen with an interest rate of 6.0%. We subsequently provided interim financing to our equity investee Blacksmith in January 2021 in the amount of $1.0 million with an interest rate of 7.0%. The maturities of the U.S. dollar loans to Celmatix and Blacksmith are short term (2021), while the maturity of the Euro loan to Eternygen is long term (2025).

European Investment Bank Loan

In 2017, we signed a financing agreement with a line of credit amounting up to €75.0 million with the European Investment Bank (EIB). Under the agreement, the total amount was provided in various tranches from 2017 until 2020. The final tranche was drawn in September 2020. Each tranche carries a fixed interest rate of 1.6%. Such interest is due and payable semi-annual or where a tranche is cancelled or prepaid. The maturity date for each tranche is seven years from the respective disbursement date of the relevant tranche. We are subject to two financial covenants, net debt leverage and equity ratio. As of June 30, 2021, we are in compliance with the financial covenants. The financing agreement also includes a success share which is paid as a percentage of future proceeds from the R&D projects for the years 2024 to 2030 and equity investments if these succeed for the period until 2030.

R&D Innovation Financing

Our R&D innovation financing loans amounted to €8.3 million with a fixed interest rate of 1.2% as of June 30, 2021 and final maturity dates ranging from 2025 to 2029. The R&D innovation financing relates to three individual R&D projects that were financed by IKB Deutsche Industriebank AG through KfW Bank. As of June 30, 2021, we drew down all tranches in an aggregate principal amount of €8.6 million in line with project progress and repaid €0.3 million of the loan during the six months ended June 30, 2021.

In the six months ended June 30, 2021, we entered into and drew down on a new long-term innovation financing loan provided by IKB Deutsche Industriebank AG through KfW Bank in the amount of €20.4 million with a fixed interest rate of 1.4%. With the loan we received a grant from KfW Bank in the amount of €0.2 million. This loan is unsecured, not directly related to a specific R&D project and must be repaid in installments between 2023 and 2031.

 

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Loan Maturities

 

     As of June 30,  

(In € thousands)

   2021      2020  

Less than one year

     50,000        6,101  

Between one and five years

     205,036        179,345  

More than five years

     113,115        161,578  
  

 

 

    

 

 

 

Total

     368,151        347,025  
  

 

 

    

 

 

 

Capital Expenditures

In order to facilitate the continued growth of our company, we regularly invest in upgrading and expanding our technology and infrastructure. For example, we have made major enhancements to our technology platform with regard to the areas of translational biology, high content imaging and proteomics. Additionally, we have made our scientific operations more efficient by adding additional state-of-the-art sample management technology. We continued our investments in the expansion and development of individual locations into 2021. Our acquisition of the Biopark by Sanofi will significantly expand our capacities at the Toulouse site in the short-to-medium term. Our completion in 2020 of a new building in Goettingen will help us expand the areas of cell therapy and EVOpanOmics. In addition, we commenced the expansion of our existing campus in Abingdon, Oxfordshire, UK in 2020, to create a major integrated R&D center. We plan to build new capacities for proteomics in Munich in the next two years, and a new building for the planned iPSC center in Hamburg in the next few years.

We have completed construction of our first J.POD® facility in North America, an integral part of the J.DESIGN platform of Just—Evotec Biologics. We expect this facility will fulfil our production requirements for the coming years and strengthen our position as a major partner in drug discovery and development with pioneering technologies in the field of biologics. This new facility became operational in August 2021. In April 2021, we announced the construction of our second J.POD® facility in Toulouse.

We also continue to further upgrade and digitize our administrative tools and systems. We will continue to make capital expenditures in order to secure the further growth and scalability of our company, including approximately €40 million to €45 million in capital expenditure planned in 2021 for replacements and growth. We expect to require an additional €25 million to €30 million of capital expenditure in the second half of 2021 and the first half of 2022, respectively, for completing our first J.POD® facility in Redmond, Washington and approximately €180 million for setting up our second J.POD® facility in Toulouse, France, construction of which began in April 2021 (supported by related funding from French authorities), and facility expansions at other sites.

We plan to fund additional capital expenditure through cash on hand, debt financing and proceeds from this offering.

Cash Flow

The following table summarizes the primary sources and uses of cash for each period presented:

 

(In € thousands)

   Six Months Ended June 30,      Year Ended December 31,  
  

     2021     

    

     2020     

    

     2020     

    

     2019     

 
    

(unaudited)

               

Net cash flows provided by (used in):

           

Operating activities

     41,105        (6,971      44,721        42,216  

Investing activities

     (96,457      (53,152      (155,089      (86,634

Financing activities

     12,457        7,921        246,409        211,263  

Total cash inflow

     (42,895      (52,202      136,041        166,845  

 

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Cash Flow from Operating Activities

Net cash flows from operating activities are primarily derived from partnered projects and the sale of products and services rendered. Our cash flows from operating activities are significantly influenced by our use of cash for operating expenses and working capital to support the business.

For the six months ended June 30, 2021, operating activities generated €41.1 million in cash and cash equivalents. The amount primarily resulted from net income of €112.7 million, after consideration of non-cash charges of €(72.1) million, which included the fair value adjustment of our investment in Exscientia Ltd. of €(116.1) million, and changes in operating assets and liabilities of €0.5 million. The increase in operating assets and liabilities was mainly driven by increases in payables mainly related to the J.POD construction (€11.0 million), deferred revenues mainly due to a prepayment of BMS for the extension of the Oncology cooperation (€11.5 million) and a decrease in receivables due to good cash collection (€7.9 million) off-set by an increase in inventory (€3.3 million), other current assets (€9.3 million) and changes in non-current tax assets in relation to R&D tax credits (€8.5 million) as well as a decreased in other current liabilities (€7.0 million).

For the six months ended June 30, 2020, operating activities resulted in a net outflow of €7.0 million of cash and cash equivalents. The amount primarily resulted from net income of €7.3 million, after consideration of non-cash charges of €35.1 million which was offset by changes in operating assets and liabilities of €(49.4) million. Changes in operating assets and liabilities was mainly driven by increases in our accounts receivables due to the overall business growth of €(15.2) million, in other current assets of €(6.3) million and in non-current tax assets in relation to R&D tax credits of €(13.8) million and a decrease in our deferred revenues of €(9.3) million and accrued liabilities of €(4.8) million.

For the year ended December 31, 2020, operating activities generated €44.7 million in cash and cash equivalents. The amount primarily resulted from net income of €6.3 million, after consideration of non-cash charges of €87.4 million and changes in operating assets and liabilities of €36.9 million, along with income taxes and interest received of €12.6 million and income taxes and interest paid of €24.7 million. Changes in operating assets and liabilities mainly driven by increases in other assets resulted mainly from VAT related receivables, from contract assets and other financial assets (foreign exchange contracts) and increases in other tax assets from non-current R&D tax receivables in France and decreases in contract liabilities resulted mainly from revenue consumptions related to our large collaborations with BMS.

For the year ended December 31, 2019, operating activities generated €42.2 million in cash and cash equivalents. The amount primarily resulted from net income of €37.2 million, after consideration of non-cash charges of €79.9 million and changes in operating assets and liabilities of €68.8 million, along with income taxes and interest received of €7.7 million and income taxes and interest paid of €13.8 million. Changes in operating assets and liabilities was mainly driven by increases in our accounts receivables due to our growing operations, increases in other tax assets in relation to R&D tax credits and decreases in our contract liabilities and deferred income due to the realization of related revenues as well as other operating income.

Cash Flow from Investing Activities

During the six months ended June 30, 2021, cash used in investing activities amounted to €96.5 million which consisted of purchases of current investments in the amount of €20.0 million, purchases of investments in affiliated companies of €13.6 million, purchases of property, plant and equipment in the amount of €72.6 million (including in respect of €47.2 million invested in the new J.POD® 1 US facility in Redmond as well as in Just – Evotec Biologics in Seattle) and the issue of convertible loans to affiliated companies of €3.0 million partially offset by €12.7 million of proceeds from the sale of current investments.

During the six months ended June 30, 2020, cash used in investing activities amounted to €53.2 million which consisted of purchases of current investments in the amount of €34.1 million, purchases of investments in

 

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affiliated companies of €16.1 million and the purchase of property, plant and equipment in the amount of €28.7 million partially offset by €25.8 million of proceeds from the sale of current investments.

During the year ended December 31, 2020, cash used in investing activities amounted to €155.1 million which consists of the acquisition of investments in the amount of €104.6 million, purchase of property, plant and equipment in the amount of €99.1 million, and the issuance of convertible loans in the amount of €6.2 million, partially offset by €54.8 million proceeds from the sale of current investments.

The €104.6 million acquisition of investments consists of the acquisition of financial assets and investments accounted for using the equity method amounting to €22.7 million, the purchase of current investments amounting to €70.9 million and the purchase of investments in affiliated companies, net of cash acquired amounting to €10.9 million. The acquisition of financial assets and investments accounted for using the equity method was mainly related to follow-on financing rounds of equity engagements, and new investments in several companies. The €99.1 million cash used for the purchase of the property, plant and equipment included €49 million for the construction of the J.POD® production facility at Just—Evotec Biologics, and €19.3 million of land and buildings acquired as result of the merger of Biopark by Sanofi SAS and Evotec (France) SAS. Further significant amounts were invested in site expansions.

During the year ended December 31, 2019, cash used in investing activities amounted to €86.6 million which consisted of acquisition of investments in the amount of €77.0 million and the purchase of property, plant and equipment in the amount of €31.3 million partially offset by €22.4 million of proceeds from the sale of current investments.

The €77.0 million acquisition of investments consisted of the acquisition of financial assets and investments accounted for using the equity method amounted to €11.7 million, the purchase of current investments amounting to €25.0 million and the purchase of investments in affiliated companies, net of cash acquired amounting to €40.3 million. The purchase of investments in associated companies and other long-term investments amounted to €11.7 million and related to follow-up financing rounds in portfolio companies and new investments.

The €31.3 million cash used for the property, plant and equipment included capital expenditures for facility expansions such as in Goettingen, Germany and Princeton, New Jersey in the United States and capacity increases across the business such as in Alderley Park, in the United Kingdom and Toulouse, France, as described under the section titled “Liquidity and Capital Expenditures—Capital Expenditures.”

Cash Flow from Financing Activities

Our primary financing activities consist of issuances of share capital, proceeds from/payments of bank loans and payments of finance lease liabilities.

Net cash provided by financing activities for the six months ended June 30, 2021 was €12.5 million which consisted of proceeds from borrowings amounting to €22.1 million, proceeds from option exercises amounting to €0.7 million, partially off-set by repayment of loans of €0.5 million and repayment of lease obligations amounting to €9.9 million.

Net cash provided by financing activities for the six months ended June 30, 2020 was €7.9 million which consisted of proceeds from borrowings amounting to €16.6 million, proceeds from option exercises amounting to €0.5 million, partially off-set by repayment of loans of €0.8 million and repayment of lease obligations amounting to €8.4 million.

Net cash provided by financing activities for the year ended December 31, 2020 was €246.4 million which consists of €250.0 million proceeds from capital increase by private placement. On October 12, 2020, we

 

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raised capital in an aggregate principal amount of €250.0 million by way of a private placement to a new long-term strategic investor, Mubadala Investment Company, a sovereign wealth fund fully owned by the government of Abu Dhabi, and Novo Holdings (Denmark). Mubadala Investment Company and Novo Holdings (Denmark) purchased an aggregate of 11,478,315 of our ordinary shares at a price of €21.7802 per share. Furthermore, net proceeds from borrowings amounting to €15.0 million and repayment of lease obligations amounting to €20.2 million contributed to the financing activities.

Net cash provided by financing activities for the year ended December 31, 2019 was €211.3 million which consisted of net proceeds from borrowings amounting to €222.3 million and repayment of lease obligations amounting to €12.9 million. Net proceeds from borrowings included net proceeds from the issuance of a promissory note in the amount of €249.2 million.

Contractual Obligations and Commercial Commitments

Our contractual obligations, other than the financing agreements and related interest rate swaps detailed in the “Liquidity and Capital Expenditures” section, consist mainly of lease obligations capitalized under IFRS 16. Lease obligations are our future minimum commitments under lease agreements within the scope of IFRS 16 and reflected on the balance sheet in our audited consolidated financial statements included elsewhere in this prospectus. Lease agreements which were not recognized in accordance with the exemptions in IFRS 16 are not material and therefore not presented here. In addition, we regularly enter a number of smaller contractual obligations related to our operations or facilities, such as supply of inventories, power supply and insurance.

We license or acquire certain third-party intellectual property to utilize in our business. Under these agreements, we are required to pay milestones, dependent on development progress and/or royalties and milestones dependent on present and future net income or on sublicensing fees received from third parties. Additionally, we have agreements with several third parties to access their technology and know-how for use in our business or within our collaborations. Under these agreements, we are required to pay a share of our revenue generated using these technologies and know-how to the respective third parties. The revenue-share obligations are usually low double-digit percentages of revenue received but can be up to 50%. However, it is not possible to predict the maximum potential amount of future payments under these agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement.

Off-Balance Sheet Arrangements

As of June 30, 2021, we did not have any off-balance sheet arrangements.

Critical Accounting Policies and Use of Estimates

The consolidated financial statements have been prepared in accordance with IFRS and its interpretations as issued by the IASB as adopted by the European Union. The consolidated financial statements have been prepared on the historical cost basis unless otherwise stated in the more detailed disclosures below.

The preparation of these consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, income and expenses. Our estimates are based on historical experience, known trends and events, and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts, and experience. The effects of material revisions in estimates, if any, are reflected in the consolidated financial statements prospectively from the date of change in estimates.

As of December 31, 2020, we had €126.1 million of goodwill in the CGU Aptuit Execute, subject to impairment testing under IAS 36. At the designated annual test date of September 30, 2020, Aptuit Execute’s

 

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recoverable amount exceeded its carrying amount by €5.7 million. The fair value less costs of disposal method was applied for determination of the carrying amount. Significant downward adjustments of the key assumptions applied in this calculation would result in the recognition of a material impairment charge. If our gross margin assumptions were to be three percent less for each planning year, which we consider to be a reasonably possible change due to the non-realization of cost improvements and economies of scale, the impairment amount to be recognized would be approximately €45 million before tax effects. Additionally, an increase in the discount rate of one percent or a decrease in the terminal value growth rate of one percent would lead to impairment charges of approximately €25 million and €15 million, respectively.

For a discussion of our significant accounting policies and other estimates, please see “Summary of significant accounting policies” in note 3 in the notes to our consolidated financial statements included in this prospectus.

Recently Adopted and Issued Accounting Standards

For a discussion of new accounting standards and interpretations not yet adopted by us, please see “Recent accounting pronouncements, not yet adopted” under note 3 in the notes to our consolidated financial statements included in this prospectus.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to several financial risks concerning specific areas including but not limited to foreign exchange risk, interest risk, liquidity risk and credit risk. Market risk is the risk that changes in market conditions will affect our results of operations or the value of the financial instruments held.

Foreign Exchange Risk

We operate via our Euro zone companies, mainly in Germany, Italy and France, but we also conduct business in the United Kingdom and the United States. Our consolidated financial statements are reported in Euros. Our exposure to the risk of changes in foreign exchange rates relates primarily to our operating activities and we carry both translational and transactional foreign exchange risk. We generate a significant portion of our revenue and incur a significant portion of our expenses in certain non-Euro currencies, principally U.S. dollars and pound sterling. We hold our deposits primarily in three major currencies (Euro, U.S. dollars and pound sterling) in which we do business. For the year ended December 31, 2020, 45% and 14% of our revenue and 17% and 24% our cost of revenue was in U.S. dollars and pound sterling, respectively. For the six months ended June 30, 2021, 46% and 12% of our revenue and 20% and 21% of our cost of revenue was in U.S. dollars and pound sterling, respectively.

We currently engage in hedging activities and use forward contracts and spot transactions to convert U.S. dollars to Euros and pound sterling by means of mitigating our exposure to exchange rate fluctuations.

Translational risk:

Exchange rate fluctuations between the applicable foreign currency and the Euro will affect the translation of foreign subsidiaries’ financial results into Euro for purposes of reporting our consolidated statements of comprehensive income. The process by which we translate each foreign subsidiary’s financial results to Euro is as follows:

 

   

assets and liabilities including goodwill of foreign subsidiaries with functional currencies other than the Euro are translated into Euro using the respective exchange rates at the end of the reporting period.

 

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income statements of subsidiaries are translated using monthly average exchange rates during the respective period.

Gains or losses resulting from translating foreign functional currency financial statements are recognized directly in other comprehensive income and realized on termination of the respective position.

Transactional risk:

We record all foreign currency transaction and remeasurement gains and losses as other finance income (expense), net on the consolidated income statement. We do not have significant operations in countries considered highly inflationary.

Interest Rate Risk

We are exposed to interest rate risk through variable interest-bearing loans as well as current investments, in particular in Germany, but also at our foreign entities. The fair value of debt varies from the carrying amount if there is a difference between the underlying interest rate to the market interest rate.

We regularly use interest rate swaps to hedge the interest rate risks from borrowings. In November 2018, we agreed to two three-year interest rate swaps with a floor at 0.00% and a notional amount of €4 million each with two German banks to swap Euribor against a fixed rate of 0.20% and 0.22%, respectively. Currently, this results in a fixed interest rate of 1.45% and 1.47%, respectively for an amount of €8 million of our credit lines.

We conduct sensitivity analyses annually based on the exposure to interest rates at the applicable reporting date, which is discussed in our consolidated financial statements included in this prospectus. Financial instruments with fixed interest rates or those covered by an interest rate swap are not subject to cash flow risks and therefore are not included in the sensitivity analysis.

Liquidity Risk

Liquidity risk is the risk that we will not be able to meet our financial obligations as they fall due. Our approach to managing liquidity is to ensure, as far as possible, that we will always have sufficient liquidity to meet liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to our reputation.

Credit Risk

Credit risk is the risk of financial loss if a customer or counterparty to a financial instrument fails to meet our contractual obligations. Our credit risk arises primarily from cash and cash equivalents and other financial assets, including deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and contract assets. We attempt to limit our exposure to credit risk by maintaining our bank accounts and short-term deposits with well-established banks. For our credit exposure to customers, we perform ongoing credit evaluations of our customers’ financial condition and maintain an appropriate specific allowance for uncollectible accounts receivable based upon the expected collectability of all accounts receivable. Our accounts receivables are generally unsecured and are not backed by collateral from our customers. As of June 30, 2021 and December 31 2020, one customer accounted for 12.0% and 9.0% of our trade receivables, respectively. Concentrations of credit risk with respect to trade accounts receivables are generally limited by a number of geographically diverse customers and our monitoring procedures.

JOBS Act and Emerging Growth Company Status

In April 2012, the JOBS Act was enacted. The exemptions and reduced reporting requirements under the JOBS Act for emerging growth companies include presentation of only two years of audited financial

 

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statements in a registration statement for an initial public offering, an exemption from the requirement to provide an auditor’s report on internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act, an exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation, and less extensive disclosure about our executive compensation arrangements. Additionally, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Such provisions are only applicable under U.S. GAAP. As a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required or permitted by the IASB. We will remain classified as an emerging growth company until the earlier of (i) the last day of the fiscal year following the fifth anniversary of the date of the completion of this offering, (ii) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (iii) the date on which we have issued more than $1 billion of non-convertible debt securities during the previous three years, or (iv) the date on which we are deemed a large accelerated filer under the rules of the SEC, which means the first day of the year following the first year in which, as of the last business day of our most recently completed second fiscal quarter, the market value of our common equity that is held by non-affiliates exceeds $700 million.

 

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BUSINESS

Overview

We are an industry-leading drug discovery and development partner for the pharmaceutical and biotechnology industry. Our mission is to discover best and first-in-class medicines for a broad range of difficult to treat diseases in collaboration with our partners. To that end, we have built a comprehensive suite of fully integrated, next generation technology platforms which we believe will transform the way new drugs are discovered. By leveraging the advanced capabilities of our integrated platforms, we are able to provide solutions to our partners that enable significant improvements in the quality of new drugs while accelerating the drug discovery process and reducing the high cost of attrition often associated with traditional drug discovery processes.

Traditional drug discovery is a lengthy, costly and complex process that is subject to a high degree of uncertainty and high rates of failure. In addition, identifying novel compounds requires extensive screening and in vitro and in vivo testing, which can be both labor intensive and time-consuming. For every successful medicine that is commercialized, there are 5,000 to 10,000 compounds that fail in drug discovery. Moreover, it takes approximately 12 years of intense research and development and approximately $2 billion for a new medicine to reach patients.

In order to address demand for faster, cheaper and better outcomes of early-stage drug discovery processes, we deliver fully-integrated drug discovery and development programs to our partners. Our expertise in deep learning and computational approaches and the integration of such knowledge across the full value chain of research, drug discovery and development is industry-leading. We possess capabilities across the early stages of precision medicine discovery, including biomarker selection, human pharmacokinetics (PK) testing, clinical trial planning, safety assessment and manufacturability. We achieve differentiated results by integrating these firmly-established R&D capabilities, cutting edge proprietary technologies and the knowledge of our experienced scientists. Our drug discovery therapeutic area expertise and capabilities covers diabetes and its complications, fibrosis, infectious diseases, CNS diseases, oncology, pain and inflammation, immunology, rare diseases, respiratory diseases, and women’s health. For the foreseeable future, a substantial majority of revenues generated from the offerings to our partners will be based on “fee-for-service” agreements or FTE-based arrangements, recognized across both our reporting segments, EVT Execute and EVT Innovate. Subject to the degree of integration of proprietary technologies, or if alliances are built on the basis of in-house R&D projects as part of EVT Innovate, we may also benefit from milestone payments and royalties.

Recent scientific and technological advancements, including the advent of patient specific disease modelling based on induced pluripotent stem cells, genomics, transcriptomics, proteomics and metabolomics, have significantly shifted the understanding of molecular biology, cell regulation and the pathogenesis of individual diseases. As scientific research advances rapidly towards understanding diseases on a molecular level and the development of personalized therapies, the need has increased for new platforms, tools and methods to better understand, interpret and translate the vast information and data that is being generated.

Over the past 25 years and in response to the challenges of the dynamic industry we serve, we have positioned Evotec at the forefront of this revolution in drug discovery, emphasizing disease, patient and drug relevance at the beginning of the drug discovery process. Based on our industry knowledge and public disclosure by industry participants, we believe that we are the only company among our identified competitors that offers chemistry, biology, transcriptomics, proteomics and iPSC-based disease modelling with multi-modality expertise across small molecules, biologics, antisense, cell and gene therapy, as well as manufacturing capabilities that span the drug development continuum, from discovery through commercialization. We have developed proprietary AI/ML capabilities that facilitate industry-leading data generation, data analytics and efficacy prediction. We believe the integration of these platforms, in a holistic way, results in differentiated scientific disease insights, operational efficiencies and technological capabilities allowing us to drive rapid progress and successful outcomes throughout the discovery and pre-clinical development phase where innovation is most critical.

 

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With more than 3,000 scientists, we leverage our technologies and platforms to develop precision medicines across multiple modalities, with the aim of ultimately making the right drug available to the right patient. Our drug candidates can be created at a more affordable cost (at up to half the cost of current benchmarks for discovery through IND application) than those currently generated by industry players, and at a faster speed (at up to 30% less time than existing benchmarks for discovery through IND application). As an example, together with Bayer, we published a white paper showing that our endometriosis project entailed a total cost to IND of €30 million, which is significantly lower than the industry benchmark of approximately $75 million (€63 million) and that the first of three clinical candidates under the collaboration was progressed to IND in less than four years, 30% less than industry benchmarks. Our ability to save time during development is important for our partners and ourselves as the potential to reach IND up to 18 months faster than the competition generates real added value in a competitive marketplace for innovative breakthrough medicines. Our work to date has resulted in 11 disclosed pipeline assets in clinical development, and over 100 pipeline assets in the discovery and preclinical phase. Moreover, we have developed a broad multi-disciplinary network of collaborations with over 800 partnerships across the pharmaceutical and biotechnology industry and academia.

We report the results of our work and collaborations through two operating segments:

 

   

EVT Execute: primarily includes fee-for-service and FTE-rate based arrangements where our customers own the intellectual property. EVT Execute accounted for 79% of our revenues from third parties in the six months ended June 30, 2021 and 79% and 79% for the years ended December 31, 2020 and 2019, respectively.

 

   

EVT Innovate: includes our internal R&D activities as well as services and partnerships that originate from these R&D activities. In addition to FTE-based revenues, we generate revenues from milestones and royalties on our pipeline assets. EVT Innovate accounted for 21% of our revenues from third parties in the six months ended June 30, 2021 and 21% and 21% for the years ended December 31, 2020 and 2019, respectively.

We leverage our offerings described throughout this prospectus across both EVT Execute and EVT Innovate. Revenue generated through our collaboration arrangements may contribute to either the EVT Execute segment or the EVT Innovate segment, depending on the nature of the contract with our customer, the ownership of the intellectual property, the stage of the project and our right to generate revenue from development success. We believe our partnership model is unique and allows us to balance and diversify the risks associated with drug discovery.

Our Innovation Hub: “Data-driven R&D Autobahn to Cures

We refer to our fully integrated discovery and development platform as our “innovation hub.” Our innovation hub comprises the platforms set forth below, the integration of which we believe allows us to drive rapid progress and successful outcomes throughout the discovery and pre-clinical development phase, creating- a “data-driven R&D Autobahn to Cures.”

 

  1.

EVOiR&D is our R&D platform, which we believe differentiates us from competition as one of the organizations able to deliver fully-integrated drug discovery and development to our partners. EVOiR&D possesses capabilities across the early stages of precision medicine discovery, including biomarker selection, human pharmacokinetics (PK) testing, clinical trial planning, safety assessment and manufacturability. EVOiR&D differentiates us from our competition because it combines multimodality expertise, interdisciplinary integration (e.g. chemistry, biology, pharmacology, toxicology, formulation development, API manufacturing, among others) across the various stages of discovery and development and expert coordination of these processes led by highly qualified and experienced scientists.

 

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  2.

EVOpanOmics and EVOpanHunter form the foundation of our industrial scale artificial intelligence, machine learning and precision medicine platforms. Our EVOpanOmics platform applies genomics, transcriptomics, proteomics and metabolomics data to profile and select promising new drug candidates based on comprehensive cell biological profiles. EVOpanHunter, our integrated data analytics platform, makes our omics data available in a user friendly manner. Users can freely interact with and combine data in a web-based system where results are available immediately and can be interpreted or used as input for subsequent steps. This rapid feedback is a crucial feature distinguishing EVOpanHunter from other similar tools.

Our artificial intelligence, machine learning and precision medicine platforms are complemented by our proprietary iPSC technology platform, which utilizes patient-derived cell-based assays for disease modelling. iPSC cell assays are crucial to accurately modeling diseases and are increasingly becoming the new gold standard to profile drug candidates in the pre-clinical stage.

 

  3.

EVOaccess is our disruptive and cost-effective approach to discover, develop and commercially manufacture biologic therapeutics. Acquired through our acquisition of Just Biotherapeutics in 2019, our Just—Evotec Biologics platform, EVOaccess, utilizes proprietary artificial intelligence and machine learning capabilities to accelerate the discovery and development of biologic drug candidates and to provide advanced manufacturing process control. Key advantages of EVOaccess include broadening the scope of disease areas for biologic drug candidates driven by significantly higher yields and lower costs, accelerating growth of biosimilars given cost advantages and making orphan diseases more amenable to biologics despite small addressable populations. The ultimate physical representation of this platform is our J.POD® facility. The J.POD® facility is the first of its kind, based on an industry-leading biologics manufacturing technology, with the first facility located in Redmond, Washington, which became operational in August 2021. J.POD® has already garnered significant interest from the pharmaceutical industry with partnerships in place with MSD, a Merck & Co. brand, ABL and Ology. In August 2020, the U.S. Department of Defense awarded Just—Evotec Biologics an order for the development of a highly efficient manufacturing process for monoclonal antibodies against COVID-19, followed by a manufacturing agreement in January 2021.

 

  4.

EVOcells is our cell therapy platform based on our proprietary and best-in-class iPSC technology. Our iPSC platform focuses on developing off-the-shelf cell therapies with long-lasting efficacy like immune cells in oncology (e.g. NK, T cells and others), beta cells for diabetes, cardiomyocytes in heart repair, retina cells in ophthalmology as well as iPSC-derived exosomes. Our lead cell therapy candidate is a regenerative therapy for type 1 diabetes that is currently in preclinical development.

 

  5.

EVOgenes is our proprietary gene therapy platform. We have a dedicated gene therapy site located in Austria with a team of experts that covers the full spectrum of services for end-to-end gene therapy development including capsids, regulatory sequences and production cell lines. Our services include the design of state-of-the-art AAV vectors for a diverse set of therapeutic payloads, the generation of AAV material for research and non-clinical studies, in vitro and in vivo proof of concept studies for target validation including screening drug candidates.

 

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Building Blocks of Data Driven R&D Autobahn to Cures

 

LOGO

We generate revenue through three core collaboration routes:

 

  1.

“Fee-for-service”: We provide stand-alone or fully integrated drug discovery and development solutions to our partners. Our solutions range across all modalities and from early target identification to manufacturing of compounds and commercial products. Well-defined work packages are typically provided and compensated at FTE-rates or on a “fee-for-service” basis, and they are distinct in scope and nature. Typical examples of such services include, among others, high-throughput screening campaigns, ADME-tox tests and API manufacturing. The “fee-for-service model” only applies as long as no intellectual property of Evotec is involved or no essential proprietary technology platforms are used. The resulting therapeutics are therefore protected by the partners’ intellectual property rights.

 

  2.

EVOroyalty: We leverage our proprietary technology platforms to develop new drug discovery projects, assets and platforms, both internally and through collaborations. Such projects allow us to create starting points for the development of strategic partnerships through our EVOroyalty collaboration model with leading pharmaceutical and biotechnology companies and academic institutions. These collaborations are typically based on EVOroyalty agreements with partners, which involve a combination of upfront payments, ongoing research payments, and significant financial upside through milestones and royalties. These collaborations enable the sharing of cost and risk as our partners typically absorb the costs of clinical development and commercialization.

 

  3.

EVOequity: We make equity investments in products, technology platforms and companies through which we obtain early access to innovation. We facilitate the acceleration of innovation by providing capital as well as access to our technology platforms, expertise and network. We see significant potential for value creation from EVOequity over the coming years from new partnerships, clinical successes and positive commercial developments of portfolio companies. We expect to realize returns on investments both from successful exits from our portfolio companies and fee-for-service and FTE-rate based revenues with our portfolio companies. As of June 30, 2021, we have 24 investments with 90 active projects in our EVOequity pipeline.

 

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Our Offering by Platform and Core Collaboration Route

LOGO

We have experienced significant growth in the recent past. From 2019 to 2020, our revenues increased by €54.5 million, or 12.2%, from €446.4 million in 2019 to €500.9 million in 2020. In the six months ended June 30, 2021, our revenues grew by €40.3 million, or 17.5%, from €231.0 million to €271.3 million compared to the six months ended June 30, 2020. Our growth is underpinned by an increase in customers to 829 in 2020 as compared to 769 in 2019. We have maintained a repeat business percentage in excess of 90% in the last two years, which we believe affirms the quality of our services and evidences high customer satisfaction. Over this time period, our revenues have become more diversified, with our top 10 customers contributing 41% of total revenues in each of 2020 and the six months ended June 30, 2021 as compared to 46% in 2019. To facilitate future growth, we intend to expand our investments into proprietary “unpartnered” R&D, which drives the development of our pipeline. Unpartnered R&D expenses have risen from €18.3 million in 2015 to €46.4 million in 2020, with a CAGR of 27%. From 2019 to 2020, our unpartnered R&D expenses increased by €8.9 million, or 23.9%, from €37.5 million to €46.4 million. In the six months ended June 30, 2021, our unpartnered R&D expenses grew by €6.2 million, or 28.7%, from €21.6 million to €27.8 million. As a result of such investments, our number of pipeline assets increased to more than 130 while equity participations increased to 24 as of June 30, 2021, with meaningful potential for acceleration on both fronts.

Our Competitive Strengths

Based on many technological advances and new biological insights, the opportunity to change the odds and improve the success rates in drug discovery has never been as clear and as achievable as today. In our view, our set-up as a fully integrated drug discovery and development innovation hub will lead to the best possible results. We believe we have built the most agile platform in the industry, and we distinguish ourselves from our competition through our competitive strengths, as described below:

 

   

Our fully integrated innovation platform has unparalleled breadth and depth: Our platform covers the full discovery, pre-clinical and early clinical development value chain. This comprehensive and unique offering resonates strongly with our partners because we offer a unique combination of disease area know-how, expertise, full-suite technology and predictive power. Our competitors in the market for external drug discovery offer services or solutions with a limited scope focusing on discrete steps within the value chain. In contrast, our platform integrates disruptive, proprietary technologies within a holistic product suite in order to enable the development of potentially first and best-in-class therapeutics. Based on our industry knowledge and the public disclosure of other industry participants, we believe that we are the only company among our identified competitors that offers chemistry, biology, transcriptomics, proteomics and iPSC-based disease modelling with multi-modality expertise across small molecules, precision medicines, biologics, cell therapies and gene therapies, as well as manufacturing capabilities that span the drug development continuum, from discovery through commercialization.

 

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We offer greater precision and higher efficiency than industry standards: The integration of precision and efficiency is in our view the solution to the industry’s challenge of constantly declining returns on R&D investments. Over the last 25 years, we have built what we believe is the most agile platform in the industry. Our proprietary discovery and development platforms leverage data, operational efficiencies and technological capabilities to drive rapid progress and successful outcomes in the early stages of the R&D process. Our proprietary technology platforms generate higher quality outcomes up to 30% faster at up to half the cost than typical industry set-ups. We also apply machine learning and artificial intelligence to our novel molecular patient databases and disease models to generate and analyze data. Through greater precision and higher efficiency than industry standards, we increase the likelihood of success in clinical trials and provide solutions to the challenge of constantly declining returns on R&D investments.

 

   

Our patient centric approach positions us at the forefront of precision medicine: We have built an advanced precision medicine platform that integrates molecular patient databases, our iPSC-based drug screening platform as well as our PanOmics and PanHunter platforms. We believe that the identification of disease relevant molecular profiles in patients is fundamental for most precision medicine approaches, and we target the development of molecular patient databases in various disease areas. For example our CKD database is derived from 10,000 CKD patient profiles. We have also developed one of the largest and most sophisticated iPSC platforms in the industry, which enables iPSC-based disease modelling and drug screening at an industrialized scale. Patient-derived disease models are the new gold standard in profiling drugs at the preclinical stage of development, eventually leading to lower attrition rates during clinical trials. This helps us drive the paradigm shift towards individualized drug discovery and allows us to address diseases in a more precise manner tailored to molecular patient profiles.

 

   

Our modality-agnostic set of solutions maximizes the potential of our integrated technology platform: Our multi-modality platform ranges across small molecules, biologics, cell and gene therapy. Our platforms are applicable to all modalities and lead to an equally modality-agnostic pipeline spanning a broad range of disease areas. We leverage our industry-leading iPSC platform for the development of next generation cell-based therapies as well as disease modelling and drug screening. With EVOgenes, we have a dedicated gene therapy research platform that should enable access to cutting edge gene therapy technology. EVOaccess aims to offer a sophisticated and integrated platform for developing and manufacturing the highest quality biologics at the lowest possible cost.

 

   

Our wide array of high-quality partnerships results in a deep, diversified pipeline: We are a partner of choice for leading pharmaceutical companies, small and large biotechnology companies, start-ups, academic institutions, patient advocacy groups, venture capitalists as well as foundations and mission driven not-for-profit organizations. Due to our value proposition for partners, we are able to retain significant commercial upside with all of our assets that are partnered in the form of royalties, milestones or equity stakes. As a result, we have built an enviable pipeline of more than 130 assets, covering a broad range of disease areas and modalities. Our pipeline benefits from our highly productive research collaborations and is designed to become one of the largest royalty portfolios in the industry. The value upside created by our pipeline comes at a low capital intensity and at an attractive risk-reward profile as our partners typically carry the clinical development costs of our assets.

 

   

Our people and culture place scientific excellence at the heart of everything we do: We are led by a strong management team with extensive industry knowledge and experience. We foster a culture of scientific excellence, demonstrated by the scientific expertise and passion of our more than 3,000 top-class scientists who work for Evotec. A large share of our employees hold at least one academic qualification, including a significant amount with a PhD degree or equivalent. We

 

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stay close to ground-breaking research through our numerous research collaborations with academic institutions such as Oxford, Heidelberg and UCLA. Our personnel strategy focuses on attracting, growing and retaining talent, developing our leaders to be great leaders, ensuring a competitive reward system, and ultimately supporting our ONE Evotec culture. Our three core values that form the basis of our corporate culture are innovation, collaboration and entrepreneurship. These values are consistent across interactions among Evotec employees and with our partners (two of our critical stakeholder groups) and are essential to our business model.

Our Growth Strategy

Our growth strategy aims to address the entirety of the R&D continuum by tackling the broadest range of disease areas utilizing a modality-agnostic approach. We believe we have built one of the most efficient integrated drug discovery, development and manufacturing infrastructures that generates the highest quality results in the fastest and most cost efficient way. In addition, by leveraging the value of our platforms and sharing intellectual property through EVOroyalty and EVOequity, we seek to de-risk our portfolio through the breadth and diversity of pipeline assets. Our goal is to have over 170 pipeline assets by the end of 2025, with our first royalties to be received in 2025.

Our strategies include:

 

   

Establishing Evotec as a best-in-class, integrated precision medicine platform: We are an industry-leading drug discovery and development partner for the pharmaceutical and biotechnology industry. Our proprietary platforms aim to integrate traditional R&D capabilities with cutting edge data analytics to deliver potentially best-in-class and first-in-class therapeutics that are designed to be patient-relevant, disease-modifying and have curative potential. We strive to be at the forefront of the ongoing paradigm shift towards precision medicine as our innovation hub allows for competitive predictive capabilities, provides better starting points for clinical research, and potentially increases the likelihood of success in clinical trials. We have built our innovation hub and modality-agnostic expertise to position us as the ‘partner of choice’ for companies of all sizes in the biopharma universe and fuel our growth in the long-term.

 

   

Strengthening our position as the premier service provider to the life sciences sector: In the past we have excelled in delivering drug discovery and development solutions, enabling us to grow our revenues by four times over the last five years, driven mainly by fee-for-service and FTE-rates based arrangements. Our current offering and capabilities stretch significantly beyond traditional contract research and development and potentially hold the key to disruptive innovation in the life sciences sector. Our growth as a service provider is underpinned by the high quality we have delivered in the past and by the current breadth of our capabilities across modalities, technologies and data integrated R&D efforts. Our two-pronged growth strategy includes adding new customers and increasing the scope of work for existing customers.

 

   

Expanding the breadth of assets within EVOroyalty: To-date we have built a pipeline of more than 130 assets, of which a significant share is partnered. We expect our pipeline assets to provide a significant stream of milestones and royalties without direct exposure to trial costs. We expect our cutting-edge key platforms (EVOpanOmics, EVOpanHunter, iPSC-based drug screening platform, EVOcells and EVOgenes) ranging across four modalities to generate additional novel drug development candidates at a rapid pace. In order to find the right partner for each of these emerging assets we leverage our unique relationships with over 800 partners globally to ensure our assets are prioritized and developed in the best way possible.

 

   

Continuing to disrupt the biologics ecosystem through EVOaccess: Since the acquisition of Just—Evotec Biologics in 2019, we have witnessed increasing demand for our disruptive, flexible

 

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and cost-effective method of biologics discovery and development. We believe we are well positioned to meaningfully impact the over $100 billion market for therapeutic antibodies and drive this market in a new direction. Our first J.POD® manufacturing facility located in Redmond, Washington, became operational in August 2021. We have significant agreements in place for our first J.POD® facility even before the completion of construction work, indicative of robust demand from existing and new partners and thus strengthening our belief in this platform. We believe that Just—Evotec Biologics will position us to establish significant integrated long-term partnerships with the potential to generate milestones and royalties. We intend to expand our EVOaccess footprint including the construction of a second J.POD® facility in Toulouse, France.

 

   

Identifying risk-balanced, high-reward opportunities through EVOequity: With EVOequity our ambition is to benefit from scientifically and commercially exciting R&D endeavors that are complementary to our R&D capabilities. As of June, 30, 2021, we held 24 investments and have seen significant scientific, strategic, financial and corporate progress on many of these projects. We continue to closely evaluate potential opportunities with a favorable risk-reward profile on an ongoing basis to expand our ecosystem.

 

   

Leveraging the synergies between our businesses: Our technology platforms and core collaboration routes have a highly symbiotic relationship. We are focused on fully integrating all of our technologies and services and enable seamless cross-fertilization of knowledge and best practices. Our expanding molecular databases screened through EVOpanOmics and analytical capabilities through EVOpanHunter ensure that our artificial intelligence and machine learning capabilities are constantly advancing. Higher quality data and analytical capabilities have the cascading effect of enhancing the quality of innovation in EVOiR&D, EVOaccess, EVOcells and EVOgenes.

Current Industry Dynamics Suggest the Need for a Disruptive Approach to R&D

Spending on R&D and the introduction of new drugs have both increased massively in the past two decades. In 2019, the U.S. pharmaceutical industry alone spent $83 billion dollars on R&D, as disclosed by the US Congressional Budget Office report published in April 2021. Adjusted for inflation, that amount is about 10 times what the industry spent per year in the 1980s. Between 2010 and 2019, the number of new drugs approved for sale in the United States increased by 60 percent compared to the previous decade. The peak so far was in 2018 with 59 new drugs approved. Since the advent of biologics, the biotechnology and pharmaceutical industry has started to deliver more drugs than ever and this trend will further accelerate with the emergence of new and converging technologies.

The budget that companies devote to R&D is determined by the amount of revenue they expect to earn from a new drug, the expected cost of developing that drug, and policies that influence the supply of and demand for drugs. The expected cost to develop a new drug, including capital costs and expenditures on drugs that fail to reach the market, has reached almost $2 billion and is expected to further increase. In contradiction to the development cost, the average global peak sales per drug have declined in the past decade – from $816 million per drug in 2010 to around $370 million in 2019, pointing to a 55% decline in commercial potential. In line with this trend, commercial returns as measured by internal rate of return (IRR) have decreased by 80% – from 10% in 2010 to 2% in 2019.

 

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All this points to the need for a drastic shift in the R&D model to simultaneously increase the quality of drugs being developed while improving the potential for commercial returns.

Evotec’s Solution—Data-driven R&D Autobahn to Cures

We believe the existing capital inefficient R&D model with its fully integrated, pharma-like value chains is no longer sustainable and, most importantly, in many aspects no longer competitive especially when it comes to execution speed of novel ideas. We strive to make Evotec’s “Data-driven R&D Autobahn to Cures” the ideal innovation hub for our partners and provide them with the necessary toolkit to carry out cutting edge research. We deliver critical solutions such as enhanced speed to the clinic, better prediction of clinical efficacy and reduced manufacturing costs. We are able to deliver these critical solutions through a combination of:

 

   

Leadership in data generation, data analytics and efficacy prediction

 

   

Biology driven scientific disease insights that drive our R&D efforts

 

   

Modality agnostic expertise (small molecule, biologics, gene therapy, cell therapy among others) that helps to make the drugs of our partners precise, affordable and more accessible

At Evotec, we believe that the future of drug discovery and development requires the integration of different disciplines and approaches to generate treatments that are patient-relevant, disease-modifying and have curative potential. Our proprietary discovery and development platforms leverage data, operational efficiencies and technological capabilities with the goal of driving rapid progress and successful outcomes in the early stages of the R&D process. We also apply machine learning and artificial intelligence to our novel molecular patient databases and disease models to generate and analyze data.

The key criterion for our decision-making is patient-relevant data, which facilitates a more stringent project prioritization cascade than typically observable in the industry. We are able to generate disease profiles at a large scale, providing a significant foundation of knowledge on which to base disease modeling and other drug discovery efforts. Our large suite of automated platforms ensures data integrity, prompt test responses and productivity. We create unique analytical packages for both our own programs and our partners’ programs, customized for each phase of development. Backed by a fully integrated drug discovery platform, all approaches are designed to contribute to the goal of improving productivity for our partners and to increase the number of our own assets, derived from our platforms, alliances as well as equity investments.

 

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Our suite of platforms is a synergistic system—the center piece is the high performance integrated R&D infrastructure (EVOiR&D), enhanced even further with advanced platforms for improved prediction and probability of success, as exemplified by EVOpanOmics, EVOpanHunter, the iPSC drug discovery platform and EVOaccess. These central platforms are applicable to all modalities—including EVOcells and EVOgenes. Our innovation hub creates value through three core collaboration routes—fee-for-service model, EVOroyalty and EVOequity.

Overview of Capabilities and Expertise in our Innovation Hub

 

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EVOiR&D - Integrated Data-Driven Research and Development

EVOiR&D is our R&D platform which we believe differentiates us from competition as one of the organizations able to deliver fully-integrated drug discovery and development programs to our partners. EVOiR&D possesses capabilities across the early stages of precision medicine discovery, including biomarker selection, human pharmacokinetics (PK) testing, clinical trial planning, safety assessment and manufacturability in the early stages of precision medicine discovery. This is achieved by seamlessly integrating firmly-established R&D capabilities, such as screening platforms, deep disease knowledge and translational models, with cutting edge proprietary technologies that can—in combination with knowledge of our experienced scientists—result in significantly improved speed, quality and cost of drug discovery. Our highly qualified and experienced team is what makes EVOiR&D unique. EVOiR&D’s integrated, industrialized, high quality and comprehensive infrastructure is utilized across all of our core collaboration routes—fee-for-service model, EVOroyalty and EVOequity.

 

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EVOiR&D Platform

 

 

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Our expertise in deep learning and computational approaches and the integration of such knowledge across the full value chain of research, drug discovery and development is industry-leading. We possess computational capabilities in the essential aspects of drug discovery and early development, including, for example, molecular design, product optimization, extensive human pharmacokinetic parameters and dose predictions, toxicity prediction and design tools. Our biomarker strategy and resources provide tailor-made biomarker solutions using state-of-the-art technologies. From our position of strength in chemistry and small molecules, we have added capabilities for additional modalities, such as biologics, proteins, RNA and antibody drug conjugates. Our drug discovery therapeutic area expertise and capabilities covers diabetes and its complications, fibrosis, infectious diseases, CNS diseases, oncology, pain and inflammation, immunology, rare diseases, respiratory diseases, and women’s health. Continuous training in technology and leadership for scientists at all levels is designed to meet or exceed industry standards.

At Evotec, we approach research, drug discovery and development as a continuum instead of disparate processes. We focus on problem solving and careful planning at the very earliest stage to maximize the potential success of clinical development. By focusing on the entire continuum, we allow for smooth transitioning from discovery and preclinical development into the clinic through our INDIGO offering. We believe INDIGO provides best-in-class governance structures to supply fit-for-purpose resourcing, key expertise, decision-gated strategies, clear and timely communication and seamless interactions between our partners and our functional teams. Within the structure of a project or partnership, we focus on the success of the inventive step in every discipline through a combination of knowledge, experience, computational power and process excellence.

Our integrated approach to research and development has helped us to meaningfully outperform well-recognized industry benchmarks. Recent benchmark data show that the costs and timelines for drug discovery have not improved in the last 10 years. Including the cost of attrition, it takes companies approximately U.S. $75 million to initiate a single regulatory toxicology study and around 5.5 years to proceed from a target to a first good laboratory practice toxicology dose or IND submission. In contrast, our integrated offering through EVOiR&D has achieved portfolio delivery to IND submission at up to half the cost and in up to 30% less time. This time saving is crucial as the potential to reach an IND up to 18 months faster means acceleration of the potential availability of innovative breakthrough medicines to the patient community and for difficult to treat diseases. It also generates significant added value to our partners and ourselves in a highly competitive marketplace where many players are pursuing the same scientific concepts and there is a race to be first-to-market.

 

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EVOiR&D’s Potential Impact on Early Stage Clinical Development

 

 

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Including attrition; DMTA = Design make test analyze; Source: Clarivate, 2018

Finding the right drug for the right patient through our EVOpanOmics, EVOpanHunter and iPSC platforms

We believe our disease relevance-focused approach will guide us to find the right drug for the right patient at the right dose much earlier in the drug discovery and development process by determining disease relevance right at the outset of the drug discovery and development phase instead of during clinical development, which has been the traditional approach. EVOpanOmics and EVOpanHunter in combination with iPSC-based disease modelling drive the foundation of our industrial scale artificial intelligence, machine learning and precision medicine platform. These hold the key to driving innovation within many of our internal R&D and partnered programs.

 

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Evotec’s precision medicine paradigm determines disease relevance right at the outset to increase clinical success rates

 

 

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Regulatory Toxicology and Pharmacology; Volume 32, Issue 1, August 2000; Pages 56-67; Journal of Health Economics Volume 47, May 2016, Pages 20-33; Clinical development success rates for investigational drugs; Nature Biotechnology volume 32, pages 40–51(2014); Evotec estimates

EVOpanOmics—Industrialized high-throughput multi-omics platform

We believe that the identification of disease-relevant molecular profiles in patients is fundamental for the majority of precision medicine approaches. Once disease-relevant molecular patient profiles have been defined, they can be used to screen and profile drug candidates in patient-derived disease models, and ultimately they can be used to identify biomarkers that can monitor disease progression during clinical development and in patients even after commercial approval. Evotec’s capabilities are deeply rooted in the paradigm shift to precision medicine.

Our approach to precision medicine is based on multi-omics. Generally, -omics technologies are widely available and often used, however they are not routinely applied to drug discovery and development. For example when it comes to genome sequencing, the industry has simply not sequenced enough genomes and effectively connected these to medical data to learn what the average genome tells us about expressed phenotypic characteristics. This means that genome sequences only provide a glimpse of a patient’s predispositions to disease and do not measure disease status or disease progression. For this, transcriptome and proteome data is needed.