EVOTEC BioSystems Aktiengesellschaft

Transcription

1 Offering Circular EVOTEC BioSystems Aktiengesellschaft Offering of up to 4,927,500 Ordinary Non-Par Value Bearer Shares Offer Price 1 13 per Share This Offering Circular has been prepared in connection with the global offering (the Offering ) of up to 4,927,500 shares in EVOTEC BioSystems Aktiengesellschaft ( EVOTEC or the Company ), each with an imputed share in the capital stock of 01 per Share (the Shares ), comprising 4,100,000 newly issued Shares (the New Shares ), 182,500 existing Shares (the Sale Shares and, together with the New Shares and the Over-allotment Shares referred to below, the Offer Shares ) being sold by the Selling Shareholder (as defined herein) and the Over-allotment Shares referred to below. The Offering consisted of a public offering in Germany and private placements outside Germany, including in the United States pursuant to Rule 144A under the U.S. Securities Act of (the Securities Act ). EVOTEC has granted to the Global Co-ordinators (as defined below), an option (the Over-Allotment Option ), exercisable on or before the 30th day following the date on which the Shares are first publicly traded, to subscribe for up to an additional 645,000 Shares (the Over-allotment Shares ) for the account of the Managers. The Offer Shares will represent approximately 41% of the outstanding Shares after completion of the Offering assuming the Over-Allotment Option is exercised in full. See Risk Factors for a discussion of certain factors that should be considered in connection with an investment in the Offer Shares. Prior to the Offering there has been no public market for the Shares. Application has been made for the Offer Shares to be admitted to the Geregelter Markt for trading in the Neuer Markt on the Frankfurt Stock Exchange. It is expected that such listing will become effective, and that dealings in the Shares on the Frankfurt Stock Exchange will commence, on 10 November It is expected that payment and delivery of the Shares will take place on or about 11 November 1999, in book-entry form through the facilities of Deutsche Börse Clearing AG ( DBC ), Cedelbank and Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear System ( Euroclear ). Joint Global Co-ordinators Warburg Dillon Read AG Deutsche Bank SG Investment Banking HASPA Hamburger Sparkasse Sal. Oppenheim jr. & Cie. Kommanditgesellschaft auf Aktien The date of this Offering Circular is 8 November 1999.

2 This Offering Circular is used exclusively in connection with the offer and sale of the Offer Shares outside Germany. The English Language Translation of the Prospectus section of this Offering Circular is a translation (though not a literal translation) of the German-language prospectus prepared for the offer and sale of the Offer Shares in Germany and the admission of the Shares on the Geregelter Markt for trading in the Neuer Markt on the Frankfurt Stock Exchange, pursuant to the laws and regulations of the Federal Republic of Germany. The Company, having made all reasonable enquiries, accepts responsibility for, and confirms that this Offering Circular contains all information with regard to the Company and the Offer Shares that is material in the context of the Offering, that the information contained in this Offering Circular is true and correct in all material respects and is not misleading, that the opinions and intentions of the Company expressed herein are honestly held and that there are no other facts, the omission of which make this Offering Circular as a whole or any of such information or the expression of any such opinions or intentions misleading. In making an investment decision, investors must rely solely on their own examination of the Company and the terms of the Offering, including the merits and risks involved. Annual reports of the Company and the documents referred to herein concerning the Company, may be inspected during normal business hours at the Company s offices at Schnackenburgallee 114, Hamburg, Germany. No person is authorised to give any information or to make any representation in connection with the Offering other than as contained in this Offering Circular and, if given or made, such information or representation must not be relied upon as having been authorised by the Company, its directors, the Selling Shareholder (as defined below) or any of the Managers. Neither the delivery of this Offering Circular nor any sale made in connection with the Offering shall, under any circumstances, create any implication that the information contained in this Offering Circular is correct as at any time subsequent to the date of this document. This Offering Circular does not constitute an offer of, or an invitation by or on behalf of, the Company, its directors, the Selling Shareholder or any of the Managers to purchase, any of the shares in the Company, nor may it be used for or in connection with any offer to, or solicitation by, anyone in any jurisdiction or in any circumstances in which such offer or solicitation is not authorised or is unlawful. No representation or warranty, express or implied, is made by the Managers or any of their affiliates as to the accuracy or completeness of the information set out in this Offering Circular and nothing contained in this Offering Circular is, or shall be relied upon as, a promise or representation by any Manager or any of its affiliates as to the past or the future. The distribution of this Offering Circular and the offering and sale of the Shares in certain jurisdictions are restricted by law. Persons into whose possession this document may come are required by the Company, its directors, the Selling Shareholder and the Managers to inform themselves about and observe such restrictions. Further information with regard to restrictions on offers and sales of the Shares and the distribution of this Offering Circular is set out under Underwriting and Sale, Selling Restrictions and Certain U.S. Transfer Restrictions below. In connection with the Offering, the Global Co-ordinators may over-allot or effect transactions which stabilise or maintain the market price of the shares at levels which might not otherwise prevail. Such stabilising, if commenced, may be discontinued at any time. Such transactions may be effected on the Frankfurt Stock Exchange or otherwise. (ii)

3 CERTAIN U.S. MATTERS The Offer Shares have not been and will not be registered under the United States Securities Act of 1933 (the Securities Act ) and are being offered and sold within the United States exclusively to persons reasonably believed to be Qualified Institutional Buyers ( QIBs ), as defined in and in reliance on Rule 144A under the Securities Act ( Rule 144A ). Each purchaser of such Shares in the United States is hereby notified that the offer and sale of such Shares to it is being made in reliance upon the exemption from the registration requirements of the Securities Act afforded by Rule 144A. Until 40 days after the commencement of the Offering, an offer or sale of Shares within the United States by any dealer (whether or not participating in the Offering) may violate the registration requirements of the Securities Act if such offer or sale is otherwise than in compliance with Rule 144A. Notice to New Hampshire Residents: Neither the fact that a registration statement or an application for a licence has been filed under Chapter 421-B of the New Hampshire Revised Statutes with the State of New Hampshire nor the fact that a security is effectively registered or a person is licensed in the State of New Hampshire constitutes a finding by the Secretary of State that any document filed under RSA 421-B is true, complete and not misleading. Neither any such fact nor the fact that an exemption or exception is available for a security or a transaction means that the Secretary of State has passed in any way upon the merits or qualifications of, or recommended, or given approval to, any person, security or transaction. It is unlawful to make, or cause to be made, to any prospective purchaser, customer or client any representation inconsistent with the provisions of this paragraph. Available Information: The Company may furnish to the U.S. Securities and Exchange Commission (the Commission ) certain information in accordance with Rule 12g3-2(b) under the U.S. Securities Exchange Act of 1934 (the Exchange Act ) and the Company may request to be added by the Commission to the list of foreign private companies that claim exemption from the registration requirements of Section 12(g) of the Exchange Act. If the Company is added to this list, it will furnish to the Commission certain information in accordance with Rule 12g3-2(b). If, at any time, the Company is neither subject to Section 13 or Section 15(d) of the Exchange Act nor exempt from reporting pursuant to Rule 12g3-2(b), it will furnish, upon request of a holder of Shares or a prospective purchaser designated by such holder, the information required to be delivered under Rule 144A(d)(4) under the Securities Act. Cautionary Note Regarding Forward-Looking Statements: Certain statements in Summary and under the captions Risk Factors, Management s Discussion and Analysis of EVOTEC s Financial Position and Earnings, Business Description, Recent Developments and Prospects and elsewhere in this Offering Circular constitute forwardlooking statements within the meaning of the U.S. Private Securities Litigation Reform Act of Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: regulations relating to safety, operational and environmental matters; the activity of the Company s competitors; trends in pricing in the markets in which the Company operates; currency fluctuations; and other factors referenced in this Offering Circular. These forward-looking statements speak only as at the date of this Offering Circular. The Company expressly disclaims any obligation or undertaking to release publicly any updates of or revisions to any forward-looking statement contained herein to reflect any change in the Company s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Possible unavailability of Preemptive Rights for U.S. Holders U.S. Holders of Offer Shares may be unable to exercise any pre-emptive rights to subscribe for securities in respect of their Offer Shares unless a registration statement under the Securities Act is (iii)

4 effective in respect of such rights or an exemption from the registration requirements under the Securities Act is available. Enforcement of Judgments: The Company is organised under the laws of Germany and the Selling Shareholder is a German citizen. The Company is a German stock corporation (Aktiengesellschaft) with its domicile in Germany. None of the Company s directors and officers named herein or the Selling Shareholder are residents of the United States, and all or a substantial portion of the assets of such persons and of the Company and the Selling Shareholder are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon the Company, the Selling Shareholder or such persons in respect of matters arising under the federal securities laws of the United States, or to enforce against them judgments of courts of the United States whether or not predicated upon the civil liability provisions of such securities laws. The Company and the Selling Shareholder have been advised by their counsel that there is doubt as to the enforceability in Germany in original actions, or in actions for enforcement of judgments of U.S. courts, of civil liabilities predicated solely upon 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. (iv)

5 UNITED STATES TAXATION The following is a summary of certain material U.S. federal income tax consequences of the acquisition, ownership and disposition of Shares by a U.S. Holder (as defined below). This summary deals only with purchasers of Shares that are U.S. Holders and that will hold Shares as capital assets. The discussion does not cover all aspects of U.S. federal income taxation that may be relevant to, or the actual tax effect that any of the matters described herein will have on, the acquisition, ownership or disposition of Shares by particular investors, and does not address state, local foreign or other tax laws. In particular, this summary does not address tax considerations applicable to investors that own (directly or indirectly) 10% or more of the voting stock of the Company, nor does this summary discuss all of the tax considerations that may be relevant to certain types of investors subject to special treatment under the U.S. federal income tax laws (such as banks, insurance companies, investors liable for the alternative minimum tax, individual retirement accounts and other tax-deferred accounts, taxexempt organisations, dealers in securities or currencies, investors that will hold Shares as part of straddles, hedging transactions or conversion transactions for U.S. federal income tax purposes or investors whose functional currency is not the U.S. dollar). As used herein, the term U.S. Holder means a beneficial owner of Shares that is (i) a citizen or resident of the United States for U.S. federal income tax purposes, (ii) a corporation, or other entity treated as a corporation, created or organised under the laws of the United States or any State thereof, (iii) an estate the income of which is subject to U.S. federal income tax without regard to its source, or (iv) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust. The summary assumes that the Company is not a passive foreign investment company ( PFIC ) for U.S. federal income tax purposes, which the Company believes to be the case. The Company s possible status as a PFIC must be determined annually and therefore may be subject to change. If the Company were to be a PFIC in any year, special, possibly materially adverse, consequences would result for U.S. Holders. See Passive Foreign Investment Company Considerations below. The summary is based on the tax laws of the United States, including the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations thereunder, published rulings and court decisions, as well as on the income tax treaty between the United States and Germany (the Treaty ), all as currently in effect and all subject to change at any time, perhaps with retroactive effect. THE SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCES SET OUT BELOW IS FOR GENERAL INFORMATION ONLY. ALL PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR OWN TAX ADVISERS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF OWNING THE SHARES, INCLUDING THEIR ELIGIBILITY FOR THE BENEFITS OF THE TREATY, THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND POSSIBLE CHANGES IN TAX LAW. Dividends General Subject to the PFIC rules discussed below, distributions paid on Shares out of current or accumulated earnings and profits (as determined for U.S. federal income tax purposes), before reduction for any German withholding tax paid by the Company with respect thereto, will generally be taxable to a U.S. Holder as foreign source dividend income, and will not be eligible for the dividends received deduction allowed to corporations. Distributions in excess of current and accumulated earnings and profits will be treated as a return of capital to the extent of the U.S. Holder s basis in the Shares and thereafter as capital gain. Foreign Currency Dividends Dividends paid in Euro will be included in income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the day the dividends are received by the U.S. Holder, regardless of whether the Euro are converted into U.S. dollars. If dividends received in Euro are converted into U.S. dollars on the day they are received, the U.S. Holder generally will not be required to recognise foreign currency gain or loss in respect of the dividend income. (v)

6 Effect of German Withholding Taxes As discussed in Taxation in the Federal Republic of Germany, under current law payments of dividends on the Shares to foreign investors are subject to German withholding taxes including a solidarity surcharge that is levied on the amount of tax withheld. Under the Treaty, the rate of withholding tax is reduced to a maximum of 15% with respect to eligible U.S. Holders. As discussed under Taxation in the Federal Republic of Germany, U.S. Holders eligible for benefits under the Treaty can apply for a refund of any taxes withheld in excess of this amount. For U.S. federal income tax purposes, U.S. Holders will be treated as having received the amount of German taxes withheld by the Company with respect to a Share, and as then having paid over the withheld taxes to the German taxing authorities. As a result of this rule, the amount of dividend income included in gross income for U.S. federal income tax purposes by a U.S. Holder with respect to a payment of dividends may be greater than the amount of cash actually received (or receivable) by the U.S. Holder from the Company with respect to the payment. Subject to certain limitations, a U.S. Holder will generally be entitled to a credit against its U.S. federal income tax liability, or a deduction in computing its U.S. federal taxable income, for German income taxes withheld by the Company. U.S. Holders that are eligible for benefits under the Treaty will not be entitled to a foreign tax credit for the amount of any German taxes withheld in excess of the 15% maximum rate, and with respect to which the holder can obtain a refund from the German taxing authorities. For purposes of the foreign tax credit limitation, foreign source income is classified into one of several baskets, and the credit for foreign taxes on income in any basket is limited to U.S. federal income tax allocable to that income. Dividends paid on the Shares generally will constitute foreign source income in the passive income basket or, in the case of certain holders, the financial services income basket. In certain circumstances, recently enacted legislation and other guidance issued by the U.S. Treasury may deny a U.S. Holder foreign tax credits (and instead may allow deductions) for foreign taxes imposed on a dividend if the U.S. Holder (i) has not held the Shares for at least 16 days in the 30-day period beginning 15 days before the ex-dividend date, during which it is not protected from risk of loss; (ii) is obligated to make payments related to the dividends; or (iii) holds the Shares in arrangements in which the U.S. Holder s expected economic profit, after non-u.s. taxes, is insubstantial. Prospective purchasers should consult their tax advisers concerning the foreign tax credit implications of the payment of these German taxes and the effect of this legislation and other guidance. Sale or other Disposition Subject to the PFIC rules discussed below, upon a sale or other disposition of Shares, a U.S. Holder generally will recognise capital gain or loss for U.S. federal income tax purposes equal to the difference, if any, between the amount realised on the sale or other disposition and the U.S. Holder s adjusted tax basis in the Shares. This capital gain or loss will be long-term capital gain or loss if the U.S. Holder s holding period in the Shares exceeds one year. Any gain or loss will generally be U.S. source, except that losses will be treated as foreign source to the extent that the U.S. Holder received dividends that were includable in the financial services income basket during the 24-month period prior to the sale. This 24-month period may be extended to cover periods in which the U.S. Holder s risk of loss is hedged. Passive Foreign Investment Company Considerations A foreign corporation will be a PFIC in any taxable year in which, after taking into account the income and assets of the corporation and certain subsidiaries pursuant to the applicable look-through rules, either (i) at least 75% of its gross income is passive income or (ii) at least 50% of the average value of its assets is attributable to assets which produce passive income or are held for the production of passive income. The Company does not expect that it will be treated as a PFIC in The Company s possible status as a PFIC must be determined annually, however, and the Company may become a PFIC in future taxable years. This determination will depend in part on the market valuation of the Company s assets, as well as on the Company s spending schedule for the proceeds from the offering of Shares. If the Company is a PFIC in any year during which a U.S. Holder owns Shares, and the U.S. Holder has not made a mark to market or qualified electing fund election for U.S. federal income tax purposes, the U.S. Holder will generally be subject to special rules (regardless of whether the Company continues to be a PFIC) with respect to (i) any excess distribution (generally, any distributions received by the U.S. Holder on the Shares in a taxable year that are greater than 125% of the average annual distributions received by the U.S. Holder in the three preceding taxable years or, if shorter, the U.S. Holder s holding period for the Shares and (ii) any gain realised on the sale or other disposition of Shares. Under these rules (a) the excess distribution or gain will be allocated rateably over the (vi)

7 U.S. Holder s holding period, (b) the amount allocated to the current taxable year and any taxable year prior to the first taxable year in which the Company is a PFIC will be taxed as ordinary income, and (c) the amount allocated to each of the other taxable years will be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year and an interest charge for the deemed deferral benefit will be imposed with respect to the resulting tax attributable to each such other taxable year. If the Company is a PFIC, a U.S. Holder of Shares will generally be subject to similar rules with respect to distributions to the Company by, and dispositions by the Company of the stock of, any direct or indirect subsidiaries of the Company that are also PFICs. Backup Withholding and Information Reporting Payments of dividends and other proceeds with respect to Shares by a U.S. paying agent or other U.S. intermediary will be reported to the U.S. Internal Revenue Service and to the U.S. Holder as may be required under applicable regulations. Backup withholding at a rate of 31% may apply to these payments if the U.S. Holder fails to provide an accurate taxpayer identification number or certification of foreign or other exempt status or fails to report all interest and dividends required to be shown on its U.S. federal income tax returns. Certain U.S. Holders (including, among others, corporations) are not subject to backup withholding. U.S. Holders should consult their tax advisers as to their qualification for exemption from backup withholding and the procedure for obtaining such an exemption. (vii)

8 UNDERWRITING AND SALE Warburg Dillon Read AG, Deutsche Bank Aktiengesellschaft, Société Générale, Hamburger Sparkasse and Sal. Oppenheim jr. & Cie. Kommanditgesellschaft auf Aktien (the Managers ) have entered into an Underwriting Agreement with the Company and the Selling Shareholder pursuant to which the Managers have agreed, subject to certain conditions, to purchase and pay for the Offer Shares. The Underwriting Agreement provides that the Managers will receive from the Company and the Selling Shareholder a combined management, underwriting and selling commission of 5% of the aggregate Offer Price of the Offer Shares. In addition, the Company has agreed to reimburse the Managers in respect of certain of their expenses incurred in connection with the Offering. The Underwriting Agreement is subject to the satisfaction of certain conditions precedent and entitles the Managers to be released and discharged from their respective obligations thereunder in certain exceptional and unpredictable circumstances (including force majeure) prior to payment being made to the Company. The Company has given certain representations and warranties to the Managers in the Underwriting Agreement and the Company has agreed to indemnify the Managers against certain potential liabilities in connection with the Offering. EVOTEC has granted to the Global Co-ordinators, the Over-allotment Option, exercisable on or before the 30th day following the date on which the Shares are first publicly traded, to subscribe for the account of the Managers up to additional 645,000 Over-allotment Shares. For certain restrictions upon the issue or sale of Shares by the Company, current shareholders and members of the managing board, see The Offering, Lock-up Agreements. SELLING RESTRICTIONS No action has been taken or will be taken in any jurisdiction by the Company or the Selling Shareholder that would permit a public offering of the Offer Shares or possession or distribution of any offering document or any amendment or supplement thereto or any other offering or publicity material relating to the Offer Shares, in any country or jurisdiction (other than Germany) where action for that purpose is required. United Kingdom Each Manager has represented and agreed that (a) it has not offered or sold and will not offer or sell any Offer Shares in the United Kingdom (except in circumstances which do not constitute an offer to the public within the meaning of the Public Offers of Securities Regulations 1995) (the Regulations ), (b) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 and the Regulations with respect to anything done by it in relation to the Offer Shares in, from or otherwise involving the United Kingdom, and (c) it has only issued or passed on, and will only issue or pass on, in the United Kingdom any document received by it in connection with the issue or sale of the Offer Shares to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or is a person to whom the document may otherwise lawfully be issued or passed on. United States The Offer Shares have not been and will not be registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, United States persons, except to QIBs as defined in and in reliance on Rule 144A under the Securities Act and to certain persons in offshore transactions in reliance on Regulation S under the Securities Act. Each Manager has agreed that, except as permitted under the Underwriting Agreement, it has not offered or sold and will not offer or sell the Offer Shares (i) as part of their distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the Offering and 30 days after the date on which the Shares are first publicly traded (the Distribution Compliance Period ), within the United States or to, or for the account or benefit of, United States persons, and it will have sent to each dealer to which it sells Offer Shares during the Distribution Compliance Period a confirmation or other notice setting forth the restrictions on offers and sales of the Offer Shares within the United States or to, or for the account or benefit of, United States persons. Terms used in this paragraph have the meanings given to them by Regulation S under the Securities Act. Transfers of the Offer Shares purchased and sold pursuant to Rule 144A are restricted as described under Transfer Restrictions below. (viii)

9 The Managers propose to offer and sell Offer Shares outside the United States in reliance on Regulation S under the Securities Act. Warburg Dillon Read AG, Deutsche Bank AG and Société Générale, acting through their respective United States affiliates, propose to offer and sell Offer Shares in the United States, provided that such offers or sales are made only to offerees or purchasers whom they reasonably believe are QIBs in transactions meeting the requirements of Rule 144A under the Securities Act. In addition, until 40 days after the commencement of the Offering, an offer or sale of Offer Shares within the United States by any dealer (whether or not participating in the Offering) may violate the registration requirements of the Securities Act if such offer or sale is made otherwise than in accordance with Rule 144A. CERTAIN U.S. TRANSFER RESTRICTIONS Each purchaser of the Offer Shares in the United States in reliance on Rule 144A under the Securities Act will be deemed to have represented and agreed as follows (terms used in this paragraph that are defined in Rule 144A or in Regulation S under the Securities Act are used herein as defined therein): (1) the purchaser acknowledges (or if it is acting for the account or benefit of another person, such person has confirmed to it that such person acknowledges) that the Offer Shares have not been and will not be registered under the Securities Act; (2) it is (a) a QIB, (b) aware that the sale of Offer Shares to it is being made in reliance on Rule 144A under the Securities Act and (c) acquiring such Shares for its own account or for the account of a QIB; and (3) the Offer Shares may not be reoffered, resold, pledged or otherwise transferred except (a)(i) to a person whom the purchaser reasonably believes is a QIB in a transaction meeting the requirements of Rule 144A, (ii) in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S or (iii) pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available) and (b) in accordance with all applicable securities laws of the states of the United States. Notwithstanding anything to the contrary in the foregoing, the Offer Shares may not be deposited into any unrestricted depositary receipt facility in respect of shares established or maintained by a depositary bank, unless and until such time as such shares are no longer restricted securities within the meaning of Rule 144 under the Securities Act. No representation can be made as to the availability of the exemption provided by Rule 144 for resale of the Shares. Any resale or other transfer or attempted resale or other transfer, made other than in compliance with the above stated restrictions, shall not be recognised by the Company. (ix)

10 English Language Translation of the Prospectus The information herein has been translated (although it is not a literal translation) from pages 1 to 137 of the German-language Prospectus prepared for the German Offering and the listing of the Ordinary Shares on the Neuer Markt of the Frankfurt am Main Stock Exchange on the basis of the requirements of the laws and regulations of the Federal Republic of Germany. The German-language prospectus is the governing document for purposes of German law. 8 November 1999 EVOTEC BioSystems Aktiengesellschaft Hamburg Offering Circular Offering of up to 4,927,500 Ordinary Non-Par Value Bearer Shares (Stückaktien) (the Offer Shares ) consisting of 2,600,000 Ordinary Non-Par Value Bearer Shares (Stückaktien) from the capital increase for cash contributions adopted by the shareholders meeting held on 7 June ,500,000 Ordinary Non-Par Value Bearer Shares (Stückaktien) (together with the 2,600,000 Shares the New Shares ) from a capital increase for cash contributions from authorised capital resolved by the Management Board with the approval of the Supervisory Board on 28 October 1999, 182,500 Ordinary Non-Par Value Bearer Shares (Stückaktien) (the Sale Shares ) being sold by the Selling Shareholder and up to 645,000 Ordinary Non-Par Value Bearer Shares (Stückaktien) (the Over-allotment Shares ) from a capital increase for cash contributions from authorised capital to be adopted, if required, by the Management Board, with the approval of the Supervisory Board, to cover the over-allotment option granted to the Global Co-ordinators (the Over-allotment Option ) each with an imputed Share in the Capital Stock of 0 1 per Share and holding full dividend rights commencing in, and including, financial year Warburg Dillon Read AG HASPA Hamburger Sparkasse SG Investment Banking Deutsche Bank Sal. Oppenheim jr. & Cie. Kommanditgesellschaft auf Aktien

11 This document also constitutes the Listing Prospectus for 11,433,000 Ordinary Non-Par Value Bearer Shares (Stückaktien) (total subscribed capital) (the Shares ) (German Securities Identification Number (WKN) ) including 2,600,000 New Shares (German Securities Identification Number (WKN) ) from a capital increase for cash contributions adopted by the Shareholders meeting held on 7 June ,500,000 New Shares (German Securities Identification Number (WKN) ) from a capital increase for cash contributions from authorised capital resolved by the Management Board with the approval of the Supervisory Board on 28 October ,500 Sale Shares (German Securities Identification Number (WKN) ) being sold by the Selling Shareholder and 7,150,500 Shares (German Securities Identification Number (WKN) ) subject to a lock-up including up to 645,000 Shares which will be made available pursuant to a securities lending agreement to cover over-allotments and which will be reclassified and will be issued with the WKN for this purpose each with an imputed share in the capital stock of 0 1 per Share and holding full dividend rights commencing in, and including, financial year 1999 of EVOTEC BioSystems Aktiengesellschaft for admission to the Geregelter Markt (Regulated Market) for trading in the Neuer Markt (New Market) on the Frankfurt Stock Exchange ISIN Code DE Common Code

12 TABLE OF CONTENTS Page General... 4 Summary... 5 The Offering Use of Proceeds, Capitalisation and Dividend Policy Risk Factors Management s Discussion and Analysis of EVOTEC s Financial Position and Earnings History of EVOTEC Business Description General Information on the Company Taxation in the Federal Republic of Germany Financial Section Recent Developments and Prospects Glossary

13 GENERAL Responsibility for the Prospectus EVOTEC BioSystems Aktiengesellschaft (until 7 August 1998 EVOTEC BioSystems GmbH) hereinafter also referred to as EVOTEC, or the Company and the undersigned Managers assume responsibility for the content of this Offering Circular and Listing Prospectus (the Prospectus ) pursuant to 13 of the German Securities Sales Prospectus Act and 77 of the German Stock Exchange Act, in conjunction with 45 of the German Stock Exchange Act, and declare that, to the best of their knowledge, the information contained herein is correct and no material aspects have been omitted. Availability of Documents for Inspection Documents of the Company mentioned in this Prospectus, as well as future quarterly and annual reports, are available for inspection and may be obtained at the Company s offices at Schnackenburgallee 114, D Hamburg, as well as at the offices of Warburg Dillon Read AG, Ulmenstraße 30, D Frankfurt am Main and Deutsche Bank AG, Taunusanlage 12, D Frankfurt am Main. Subject Matter of the Prospectus This Offering Circular is issued in respect of the offering of up to 4,927,500 Shares consisting of: ( 2,600,000 New Shares from the capital increase for cash contributions adopted by the shareholders meeting held on 7 June 1999, ( 1,500,000 New Shares from the capital increase for cash contributions from authorised capital resolved by the Management Board, with the approval of the Supervisory Board, on 28 October 1999, ( 182,500 Sale Shares being sold by the Selling Shareholder and, ( up to 645,000 Over-allotment Shares from a capital increase from cash contributions from authorised capital to be adopted, if required, by the Management Board, with the approval of the Supervisory Board, to cover the Over-allotment Option, each with full dividend rights commencing in, and including, financial year The Prospectus also constitutes the Listing Prospectus in respect of 11,433,000 Shares of EVOTEC BioSystems Aktiengesellschaft, each having full dividend rights commencing in, and including, financial year The admission of the Shares to the Geregelter Markt for trading in the Neuer Markt was applied for on 14 September 1999 and granted on 8 November Trading in the Neuer Markt is expected to commence on 10 November Trademarks and other Proprietary Marks This document contains various trade names, trademarks, logos, devices, product names, service marks and brands which are proprietary to the Company. The following words are registered trademarks or trademarks of the Company, either in Germany or in other jurisdictions: EVOTEC; EVOTEC logo; EVOscreen; EVOfactory; EVOseek; NANOSTORE; ALGOCHEM. 4

14 SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this Prospectus EVOTEC BioSystems AG Strategy Summary of the Offering The Offering EVOTEC is a biotechnology company serving the life science industry. It designs and develops ultra-high-throughput Screening systems and offers products and services to increase the speed, accuracy and efficiency of the drug discovery process. EVOTEC has integrated its core technologies to form EVOscreen, a powerful drug discovery platform designed to provide solutions for the evolving ultra-high-throughput Screening requirements at the various stages of the drug discovery value chain in the pharmaceutical industry. Existing alliance partners of EVOTEC include Novartis Pharma AG ( NOVARTIS ), SmithKline Beecham Corporation/SmithKline Beecham Pharmaceuticals plc ( SMITHKLINE BEECHAM ), Pfizer Inc. ( PFIZER ), as well as QIAGEN and Genome Pharmaceuticals Corporation AG ( GPC ). The Company believes that its drug discovery platform, including its further upstream and downstream applications of the initial primary screening of very large compound libraries, overcomes a number of the shortcomings of other technologies conventionally used in the drug discovery process. The Company operates its business as four business units: (i) the Drug Discovery Technology unit collaborates with third parties to develop EVOTEC s platform technology (current technology collaborations include NOVARTIS, SMITHKLINE BEECHAM and PFIZER); (ii) the Drug Discovery Services unit, which enters into service contracts with third parties to provide screening, assay development and early drug and target characterisation services on a fee-for-service basis; (iii) the Drug Discovery Products unit will combine drug discovery targets from third parties with EVOTEC s technology platform to develop drug candidates for outlicensing to life sciences companies for further development; and (iv) the Instruments unit, which designs and sells instruments used in the drug discovery process. The Company s near-term focus is to grow its Drug Discovery Services business to become a leading provider of outsourced screening, assay development and early drug and target characterisation services to the life sciences industry, while continuing to develop its platform technology by entering into a limited number of additional technology collaborations. Over the longer term, the Company will seek to capture more of the value created by its technology platform by obtaining targets and libraries for proprietary development, either alone or in collaborations with owners of such targets or libraries. Some of these activities may be carried out through separately financed and managed companies. As the manufacturing and marketing of instruments becomes more routine, the Company expects to outsource the Instruments business either to third parties or to separately financed and managed instrument companies. The Offering consisted of a public offering of the Offer Shares in the Federal Republic of Germany by the Global Co-ordinators and Société Générale, Hamburger Sparkasse and Sal. Oppenheim jr. & Cie. KGaA (collectively the Managers ) as well as private placements in Europe (excluding Germany) and in the United States only to certain institutional investors ( qualified institutional buyers ) in reliance on Rule 144A under the United States Securities Act of 5

15 Offer Shares Over-allotment Option Shareholders Prior to the Offering Global Co-ordinators (Bookrunners) and Lead Managers Price Range, Offering Price and Number of Shares Allotted Subscribed Capital of the Company 1933 ( U.S. Securities Act ), during the period from 2 November 1999 to 8 November 1999 (the Offering ). The Offering consisted of up to 4,927,500 Offer Shares of which 4,100,000 New Shares were issued by the Company, up to 645,000 Over-allotment Shares which will be issued by the Company if the Over-allotment Option is exercised and 182,500 Sale Shares which were sold by the Selling Shareholder. The Company has granted Warburg Dillon Read AG and Deutsche Bank AG, in their capacity as Global Co-ordinators and Lead Managers, the Over-allotment Option to subscribe for up to 645,000 Over-allotment Shares from a capital increase for cash contributions from authorised capital to be issued pursuant to a resolution adopted by the Management Board, with the approval of the Supervisory Board, if needed, to cover the over-allotment. This Over-allotment Option may be exercised, in whole or in part, within 30 calendar days following the date on which the Shares are first publicly traded. Shares needed to cover over-allotments will initially be provided to the Global Co-ordinators from the portfolio of a shareholder by means of a securities lending arrangement. Prior to the Offering approximately 23% of the Company s subscribed capital of 0 7,333,000 was held by institutional investors, in particular banks and venture capital funds. Approximately 77% was held by, among others, the founders, advisers, employees and Supervisory Board members of the Company. Upon completion of the Offering, the shareholders prior to the Offering will hold approximately 63% (on the assumption that they do not purchase shares in the Offering and, if the Over-allotment Option is exercised in full, 59%) of the Company s subscribed capital. Approximately 37% of the Company s subscribed capital (if the Over-allotment Option is exercised in full, 41%) was widely distributed. Warburg Dillon Read AG, Frankfurt am Main and Deutsche Bank AG, Frankfurt am Main. The price range within which purchase offers could be made was determined as between 0 11 and 0 13 and was published in the Börsen-Zeitung on 3 November The Offer Price per Offer Share was determined as 0 13 on 8 November Investors who have placed their order through one of the Managers will be able to obtain from such Manager information as to the number of Offer Shares allotted to them from 9 November The Offer Price will be payable on 11 November Following the registration with the Commercial Register of the capital increase adopted by the shareholders meeting on 7 June 1999 as well as the capital increase for cash contributions from authorised capital adopted by the Management Board with the approval of the Supervisory Board on 28 October 1999, the Company s subscribed capital amounts to 0 11,433,000 (divided among 11,433,000 ordinary non-par value shares with an imputed share in the capital stock of 0 1 per Offer Share). If the Over-allotment Option is fully exercised, the subscribed capital will be increased by 0 645,000, to 0 12,078,000 (divided among 12,078,000 ordinary non-par value 6

16 shares with an imputed share in the capital stock of 0 1 per Offer Share). Designated Sponsors in the Neuer Markt Securities Identification Numbers Contemplated Neuer Markt Abbreviation Lock-up Agreements Preferred Allotment to Employees and Business Partners Voting Rights Warburg Dillon Read AG, Frankfurt am Main and Deutsche Bank AG, Frankfurt am Main The German security identification number( WKN ) for the Shares is , the International Securities Identification Code ( ISIN ) is DE and the Common Code is EVT The Company has agreed separately with the Global Co-ordinators and with Deutsche Börse AG that during the first six months following the admission of the shares to the Neuer Markt it will not, either directly or indirectly, offer, sell or market any shares nor take any other measures which have the economic effect of a sale. Upon application, Deutsche Börse AG can release the Company from this restriction, but the written consent of the Global Co-ordinators is also required to release the Company. In accordance with the selling restrictions of the Neuer Markt the shareholders prior to the Offering have agreed that during the first six months following the first public trading of the shares, they will, neither directly nor indirectly, offer, sell or market any shares held by them. Upon application, Deutsche Börse AG can release any or all shareholders from this restriction. These restrictions also apply to any transaction with the economic effect of a sale, e.g. the granting of option and conversion rights for shares or other similar transactions. The members of the Management Board, have agreed that they will not offer, sell or market, directly or indirectly, any shares held by them within a period of 12 months following the first public trading of the shares without the prior consent of the Global Co-ordinators. In addition, certain key employees, including the Members of the Management Board, have agreed with the Company that even after the 12-month lock up has expired they will not dispose of more than 50% of their holdings before November The Company can, at its discretion, release the employees from this restriction. Except as described above, for all other shareholders of the Company prior to the Offering, there are no restrictions on the disposal of their shareholdings beyond the first six months following the first public trading of the shares. The issuance of share options under the employee share option programme is exempt from the lock-up provisions. The special exercise restrictions of the employee share option programme described in this Prospectus under Business Description Share Option Programme apply to options acquired pursuant to the provisions of this programme. A maximum of 7% of the Offer Shares placed was reserved for preferred allotment to the employees and certain business partners of the Company. Each share is entitled to one vote. 7

17 Dividend Rights Listing Use of Proceeds Delivery of the Shares and Payment The Offer Shares carry full dividend rights commencing in, and including, financial year The admission of the Company s entire capital, after the capital increases, to the Regulated Market (Geregelter Markt ) for trading on the New Market (Neuer Markt ) of the Frankfurt Stock Exchange (Frankfurter Wertpapierbörse) was granted on 14 September Trading on the Neuer Markt is expected to commence on 10 November The proceeds from the capital increases and the subsequent placement of the resulting Shares by the Company will be used to integrate additional technologies into EVOTEC s drug discovery platform, to build up its screening services business including a screening facility in the US and for its own drug discovery projects. In addition, the Company intends to wholly or partially repay a loan and to reserve a portion of the proceeds in order to be able to take advantage of opportunities for strategic alliances. The net proceeds from the Offering for the Company (after deduction of Managers commissions and costs) will be approximately million. The Managers commissions will be approximately million and the costs are expected to amount to approximately million. The proceeds from the placement of the Sale Shares will be paid to the Selling Shareholder. The Selling Shareholder will bear the commissions in respect of the Sale Shares and other costs incurred in connection with the Offering in the amount of approximately million. It is expected that payment and delivery of the Offer Shares will occur on 11 November The Offer Shares are represented by a number of permanent global certificates with global dividend coupons, some of which have already been deposited with Deutsche Börse Clearing AG, ( DBC ) Frankfurt am Main, Germany. The Offer Shares will be made available to the shareholders in book-entry form and credited to an account at their deposit bank. Under the Company s Articles of Association, shareholders have no right to demand delivery of definitive share certificates. Investors may elect for Shares to be deposited on their behalf in a custodial account at a bank which maintains an account with DBC or in a custodial account at a participant in the Euroclear System operated by Morgan Guaranty Trust Company of New York, Brussels office, or at Cedelbank, Luxembourg. 8

18 Selected Financial Data of EVOTEC* From the US GAAP CONSOLIDATED BALANCE SHEETS (figures in DM thousands) As at 31 December As at 30 June (unaudited) (unaudited) (unaudited) Summary Balance Sheet Data Total current assets... 5,739 6,886 42,009 38,774 39,692 Fixed assets, net... 2,053 3,315 9,543 7,899 11,144 Other non-current assets, net... 1, Investment in affiliated company Total assets... 8,953 10,454 52,034 47,034 51,460 Total current liabilities... 7,601 7,340 8,044 9,666 14,908 Stockholders loan ,400 7, Liabilities to silent partners... 11,800 12, ,400 0 Long-term loan ,750 4,375 8,125 Deferred revenues , ,350 0 Other non-current liabilities Total liabilities... 19,407 23,583 24,987 27,798 23,044 Total stockholders equity (deficit) (10,454) (13,129) 27,047 19,236 28,416 Total liabilities and stockholders equity... 8,953 10,454 52,034 47,034 51,460 From the US GAAP CONSOLIDATED STATEMENTS OF OPERATIONS (figures in DM thousands) Year ended 31 December Six months ended 30 June (unaudited) (unaudited) (unaudited) Results of Operations Revenue: Research and development revenue... 5,112 13,025 13,145 5,060 3,648 Product sale revenue , Total revenue... 5,112 13,810 14,294 5,355 4,383 Operating costs and expenses: Research and development expense... 5,187 11,401 16,200 7,831 11,449 Cost of product sales Selling, general and administrative expenses... 2,569 4,561 9,664 4,374 5,037 Total operating costs and expenses... 7,756 15,962 26,167 12,205 16,708 Loss from operations... (2,644) (2,152) (11,873) (6,850) (12,325) Other non-operating income (expense) (502) ,144 Loss before income taxes and minority interest... (2,496) (2,654) (10,949) (6,343) (11,181) Income tax (expense) benefit... (16) (21) Minority interest Net loss... (2,512) (2,675) (10,932) (6,343) (11,163) 9

19 From THE US GAAP CONSOLIDATED STATEMENTS OF CASH FLOWS (figures in DM thousands) As at 31 December As at 30 June (unaudited) (unaudited) Net cash provided by (used in) operating activities... 1,318 (15,753) (6,417) (10,641) Net cash used in investing activities... (2,765) (14,105) (10,521) (2,139) Net cash provided by financing activities... 2,000 55,040 42,308 4,175 Net increase (decrease) in cash ,182 25,370 (8,605) Cash and cash equivalents at beginning of year... 5,440 5,993 5,993 31,175 Cash and cash equivalents at end of year... 5,993 31,175 31,363 22,570 Note: Unless otherwise stated all financial data in this Prospectus are based on the consolidated financial statements of EVOTEC and its subsidiary EVOTEC Analytical Systems GmbH (collectively referred to as the EVOTEC Group ) prepared in accordance with generally accepted accounting principles in the US ( US GAAP ). The consolidated financial statements as at 31 December 1997 and 1998 were audited by KPMG Deutsche Treuhand-Gesellschaft; the consolidated financial statements as at 31 December 1996 as well as the interim financial statements as at 30 June and 31 July 1998 and 1999 are unaudited. Beginning in financial year 1998 the 50% shareholding of EVOTEC Analytical Systems GmbH in QE-Diagnostiksysteme GmbH is included in the financial statements of the EVOTEC Group in accordance with the equity method. Since 31 December 1998, the group has been expanded by the addition of EVOTEC NeuroSciences GmbH, which was founded in 1999 and included in the consolidated financial statements for the first time. * A summary of the financial data for the seven month ended 31 July 1999 can be found at pages 30 and 31 of this Prospectus. 10

20 THE OFFERING General The Offer Shares described in this Prospectus comprised a total of up to 4,927,500 ordinary nonpar value shares consisting of 2,600,000 New Shares from a capital increase for cash contributions adopted by the shareholders meeting held on 7 June 1999, 1,500,000 New Shares from a capital increase for cash contributions from authorised capital which was resolved by the Management Board, with the approval of the Supervisory Board, on 28 October 1999 and implemented in full on 8 November 1999, 182,500 Sale Shares sold by the Selling Shareholder, Professor Heinrich Schulte, and up to 645,000 Over-allotment Shares from a capital increase for cash contributions from authorised capital to be adopted, if required, by the Management Board with the approval of the Supervisory Board; each Share with an imputed share in the capital stock of 0 1 per Share. The Offering consisted of a public offering of the Offer Shares in the Federal Republic of Germany by the Global Co-ordinators, Société Générale, Hamburger Sparkasse and Sal. Oppenheim jr. & Cie. KGaA (collectively the Managers ) as well as private placements in Europe (excluding Germany) and in the United States only to certain institutional investors ( qualified institutional buyers ) in reliance on Rule 144A under the United States Securities Act of 1933 ( U.S. Securities Act ), during the period from 2 November to 8 November 1999 (the Offering ). The price range per Offer Share within which purchase offers could be made was determined as between 0 11 and 0 13 and published in the Börsen-Zeitung on 3 November The Offer Price was determined as 0 13 on 8 November 1999, based on the order book prepared during the book-building period. Investors who have placed their order through one of the Managers will be able to obtain from such Manager information as to the number of Offer Shares allotted to them from 9 November The Offer Price will be payable and delivery of the Offer Shares will occur on 11 November The Company has granted Warburg Dillon Read AG and Deutsche Bank AG, in their capacity as Global Co-ordinators and Lead Managers, the Over-allotment Option which may be exercised, in whole or in part, within 30 calendar days from the date on which the Shares are first publicly traded. One shareholder will initially loan the Global Co-ordinators Shares from his holding to cover any overallotments by means of a securities lending arrangement. In connection with this Offering, the Global Co-ordinators, may over-allot or effect transactions which stabilise or maintain the market price of the shares at levels other than those which might otherwise prevail in the open market. Such stabilising, if commenced, may be discontinued at any time. 11

21 Shareholders Prior to the Offering To the best of the Company s knowledge the shareholders prior to the Offering held the following interests in the share capital of the Company: Percentage Percentage Shareholding Shareholding Subsequent to Subsequent to the Offering but the Offering if the Number of Percentage Prior to the Over-allotment Shares Shareholding Exercise of the Option is Prior to the prior to the Over-allotment Exercised Offering Offering Option in Full Prof. Dr. Freimut Leidenberger , % 8.35% 7.91% Prof. Dr. Heinrich Schulte (1) , % 4.57% 4.33% Dr. Karsten Henco , % 5.66% 5.36% TVM Techno Venture Management III GmbH & Co. Beteilgungs-KG , % 5.31% 5.03% Roland Oetker , % 4.21% 3.99% HASPA Beteiligungsgesellschaft für den Mittelstand , % 3.66% 3.47% Prof. Dr. Rudolf Rigler , % 2.81% 2.66% HSBC Private Equity Investments Ltd , % 2.57% 2.43% Prof. Dr. Manfred Eigen , % 2.41% 2.28% Dr. Ruthild Winkler-Oswatitsch , % 2.41% 2.28% Max Römer , % 2.34% 2.22% Max-Planck-Gesellschaft , % 2.19% 2.07% Deutsche Bank AG , % 1.80% 1.71% Dr. Jürgen Schumacher , % 1.43% 1.36% Dr. Björn Lindemann , % 1.31% 1.24% Jörn Aldag , % 1.28% 1.22% Prof. Dr. Charles Weissmann , % 1.01% 0.95% Dr. Klaus Tschira , % 1.00% 0.94% NEPTUNO Verwaltungs- und Treuhand-Gesellschaft mbh , % 0.96% 0.91% Prof. Dr. Detlev Riesner... 93, % 0.81% 0.77% Hans Hermann Münchmeyer... 74, % 0.65% 0.61% Alafi Capital Corp... 73, % 0.64% 0.61% Dr. Timm-Heinrich Jessen... 73, % 0.64% 0.60% Others (individually holding less than 1%) , % 4.50% 4.26% 7,333, % 62.54% 59.20% (1) Selling Shareholder Following the placement of all Shares being offered, the shareholders prior to the Offering hold a 62.54% (on the assumption that they do not purchase shares in the Offering and, if the Over-allotment Option is exercised, 59.20%) interest in the Company s share capital, which amounts to 0 11,433,000 (up to 0 12,078,000, respectively). As a result 37.46% of the Company s subscribed capital (with the Over-allotment Option, 40.80%) was widely distributed in the Offering. Lock-up Agreements The Company has separately agreed with Deutsche Börse AG and with the Global Co-ordinators that during the first six months following the admission of the shares to the Neuer Markt it will not, either directly or indirectly, offer, sell or market any shares nor take any other measures which have the economic effect of a sale. Upon application, Deutsche Börse AG can release the Company from this restriction, but the written consent of the Global Co-ordinators is also required. In accordance with the selling restrictions of the Neuer Markt, the shareholders prior to the Offering have agreed that during the first six months following the first public trading of the shares, they will, neither directly nor indirectly, offer, sell or market any shares held by them. Upon application, Deutsche Börse AG can release any or all shareholders from this restriction. This restriction also applies to any 12

22 transaction with the economic effect of a sale, e.g. the granting of option and conversion rights for shares or other similar transactions. In order to aid Deutsche Börse AG in the supervision of the lock-up agreements, two different German Securities Identification Numbers ( WKN ) have been issued in respect of the Shares. WKN has been issued in respect of the Offer Shares and WKN has been issued in respect of the remaining Shares subject to the lock-up agreements. The latter WKN is marked in the collective securities amount for the Shares held with Deutsche Börse Clearing AG as blocked against trading, so that no transfer of Shares subject to the lock-up agreements will be possible for the duration of the lock-up period required by Deutsche Börse AG. The Chairman of the Company, Dr. Karsten Henco, has granted a securities loan to the Global Coordinators for the purpose of covering over-allotments of up to 645,000 additional shares. To the extent Shares are allotted from such securities loan, such Shares will immediately be reclassified by Deutsche Börse Clearing AG and will be issued with the WKN The securities loan will be repaid by exercise of the Over-allotment Option and/or by purchase at Shares in the market. On the day of expiry of the lock-up periods required by Deutsche Börse AG, the account holdings under the two WKNs will be automatically combined under WKN and the blocked WKN will be extinguished. The members of the Management Board, have agreed that they will not offer, sell or market any shares held by them within a period of 12 months following the first public trading of the shares without the prior consent of the Global Co-ordinators. In addition, certain key employees, including members of the Management Board, have agreed with the Company that even after the 12-month lock up has expired they will not dispose of more than 50% of their holdings before November The Company can, at its discretion, release the employees from this restriction. Except as described above, for all other shareholders of the Company prior to the Offering, there are no restrictions on the disposal of their shareholdings beyond the first six months following the first public trading of the shares. The issuance of share options under the employee share option programme is exempt from the lock-up provisions. The special exercise restrictions of the employee share option programme described in this Prospectus under Business Description Share Option Programme apply to options acquired pursuant to the provisions of this programme. Preferred Allotment to Employees and Business Partners A maximum of 7% of the Offer Shares placed was reserved for preferred allotment to the employees and business partners of the Company. Voting Rights Each share is entitled to one vote. Dividend Rights Listing The Shares carry full dividend rights commencing in, and including, financial year In connection with the Offering, the admission of the Company s entire capital, after the capital increase, to the Geregelter Markt for trading on the Neuer Markt of the Frankfurt Stock Exchange (Frankfurter Wertpapierbörse) was applied for on 14 September Trading on the Neuer Markt is expected to commence on 10 November Delivery of the Offer Shares and Payment It is expected that payment and delivery of the Offer Shares will occur on 11 November The Offer Shares are represented by a number of permanent global certificates with global dividend coupons, some of which have already been deposited with Deutsche Börse Clearing AG, Frankfurt am Main, Germany. The Offer Shares will be made available to the shareholders in book-entry form and credited to an account at their deposit bank. Under the Company s Articles of Association, shareholders have no right to demand delivery of definitive share certificates. 13

23 Investors may elect for Shares to be deposited on their behalf in a custodial account at a bank which maintains an account with Deutsche Börse Clearing AG, or in a custodial account at a participant in the Euroclear System operated by Morgan Guaranty Trust Company of New York, Brussels office, or at Cedelbank, Luxembourg. Securities Identification Numbers The German security identification number (WKN) for the Offer Shares is and for the Shares subject to the lock-up agreements is ; their International Securities Identification Code (ISIN) is DE ; and their Common Code is Contemplated Neuer Markt Abbreviation EVT Designated Sponsors in the Neuer Markt Warburg Dillon Read AG, Frankfurt am Main and Deutsche Bank AG, Frankfurt am Main. 14

24 Use of Proceeds USE OF PROCEEDS, CAPITALISATION AND DIVIDEND POLICY The proceeds from the capital increase and the subsequent placement of the resulting Shares will be used to integrate, develop and acquire additional technologies into EVOTEC s drug discovery platform, to build up its screening services business including a screening facility in the US and for its own drug discovery projects. In addition, the Company may wholly or partially repay a loan and reserve a portion of the proceeds in order to be able to take advantage of opportunities for strategic alliances. The net proceeds from the Offering for the Company (after deduction of Managers commissions and costs) will be approximately million. The Managers commissions will be approximately million and the costs are expected to amount to approximately million. The proceeds from the placement of the Sale Shares by the Selling Shareholder will be paid to the Selling Shareholder. The Selling Shareholder will bear the commissions in respect of the Sale shares sold by him in the course of the Offering and other costs incurred in connection with the Offering in the amount of approximately million. Capitalisation The following table sets out the capitalisation of the EVOTEC Group according to US-GAAP as at 31 July 1999 and as adjusted to reflect the issue of the Shares (assuming the Over-allotment Option is not exercised): As at 31 July 1999 Historical Adjusted (DM thousands) Equity Share capital... 14,342 22,361 Share premium... 50, ,260 (1) Retained loss... (38,924) (38,924) Total equity... 26, ,697 Interest bearing debt... 9,375 9,375 Total Capitalisation... 35, ,072 (1) Net of commissions and estimated costs of the Offering Dividend policy The Company s annual financial statements, together with a proposal for a shareholders resolution on the appropriation of balance sheet profits, are to be submitted to the Supervisory Board immediately following their preparation. Within the first eight months of each fiscal year and following receipt of the report prepared by the Supervisory Board pursuant to 171, subparagraph 2 of the Stock Corporation Act (Aktiengesetz), a shareholders meeting is convened to adopt resolutions concerning formal discharge of the Management Board and the Supervisory Board, appropriation of any net annual profits, selection of auditors and, in circumstances prescribed by the Act, approval of the annual financial statements. The payment of future dividends will be dependent on the Company s earnings, its financial situation and cash requirements, general business conditions in the markets in which the Company operates and legal, tax and regulatory considerations. The Company has never declared or paid any dividends and currently intends to retain all available earnings generated by its operations for the development and growth of its business. 15

25 The ability of the Company to pay dividends to shareholders is assessed solely on the basis of the financial statements of EVOTEC BioSystems AG prepared pursuant to German statutory principles ( HGB ). 31 December 31 July (unaudited) (unaudited) (unaudited) Profit/loss (HGB)... TDM (1,735) 1,150 (10,706) (7,330) (12,812) Profit/loss per share based on a capital of 0 7,333,000 (HGB)... DM (0.24) 0.16 (1.46) (1.00) (1.75) Profit/loss based on a capital of 0 11,433,000 (HGB)... DM (0.15) 0.10 (0.94) (0.64) (0.90) Consolidated loss (US GAAP)... TDM (2,512) (2,675) (10,932) (6,599) (13,363) Consolidated loss per share based on a capital of 0 7,333,000 (US GAAP)... DM (0.34) (0.37) (1.49) (0.90) (1.82) Consolidated loss per share based on a capital of 0 11,433,000 (US GAAP)... DM (0.22) (0.23) (0.96) (0.58) (1.17) 16

26 RISK FACTORS In deciding to purchase Shares in the Offering, prospective investors should carefully consider the following risk factors together with other information contained in this Prospectus. In deciding to purchase Shares in the Offering prospective investors should consider that the Shares represent particularly high-risk securities. Limited Operating History; Uncertainty of Future Profitability The Company commenced operations in 1993 and has incurred losses in all financial years. With the exception of revenues from technology development and transfer agreements, to date, the Company has not generated substantial revenues. The Company s expansion of its operations and continued development of its products will require a substantial increase in marketing and sales and research and development expenditures for at least the next several years. As a result, the Company expects to continue to incur operating losses for the next several years. Due to the Company s limited operating history and limited experience in the commercial exploitation of its technologies, no assurance can be given that the Company will achieve profitability in the future. The Company s profitability will depend on its ability to successfully develop and commercialise its products and services and to successfully out-license targets and compounds and validated lead/target products to its customers. Accordingly, the extent of future losses and the time required to achieve profitability, if achieved at all, is highly uncertain. Moreover, if profitability is achieved, the level of such profitability cannot be predicted and may vary significantly from quarter to quarter. Even if the Company is successful with the commercial exploitation of its technologies in the future, there can be no assurance that it will make a profit. The Company has entered into three significant commercial technology development and transfer agreements (with NOVARTIS, SMITHKLINE BEECHAM and PFIZER) from which the majority of the Company s revenues are derived. All significant payments under the NOVARTIS agreement have already been paid to the Company. A supplementary agreement with SMITHKLINE BEECHAM has recently been signed, making certain amendments to the collaboration agreement. Despite the fact that the Company has agreements with its current collaboration partners or with other companies there can be no assurance that it will make a profit. Future revenues under the collaboration agreements may depend in whole or in part upon the Company s ability to meet certain milestones set out in the collaboration agreements. No assurance can be given that the Company will meet all such milestones on a timely basis or at all or that failure to meet certain milestones will not result in the termination of one or all of the current collaboration agreements. New Business Strategy Commercialisation of Screening Services and Products The Company s current strategic business model, which for the Company is new and unproven, involves areas at business in which it has only limited or no previous experience, in particular the commencement of screening services for customers, the independent preclinical drug development and the design and manufacture of analytical instruments. A major part of the Company s business plan involves the commercialisation of products and services where the Company to date has only a limited track record. The Company has only commercially launched its products and services on a limited scale and it has not identified any chemical compound or target, which has been developed into a marketable drug. Accordingly, the Company is subject to the risks inherent in the operation of a new business such as the failure to identify any new promising validated targets or compounds, failure to develop effective sales, marketing and distribution channels for its products and services and failure to achieve market acceptance. Demand for the Company s products and services will depend upon the extent to which pharmaceutical and biotechnology companies are willing to outsource the drug discovery process and to obtain licences for compounds and validated targets developed by the Company. It further depends on the degree to which the life science industry adopts the Company s technologies as a drug discovery tool. A lack of demand for the Company s products and services would have a material adverse effect on the Company s business, financial situation and results of operations. Rapid Technological Change; Technological Uncertainty The pharmaceutical and biotechnology market is characterised by rapid technological change and frequent new product introductions. The Company s future success will depend on its ability to enhance its current and planned products and services and to develop and introduce new products and services that address the evolving needs of its customers. The Company may experience difficulties that could delay or prevent the successful development, introduction and marketing of its new products or its product enhancements. In addition, the Company s technology platform is comparatively diversified, 17

27 including components each of which requires state of the art or even pioneer know-how in the area of biochemistry, chemistry, physics and information technology. It will be difficult for the Company to keep abreast of the rapid change in each of these areas. The Company is already aware that some of its competitors have been able to shorten the distance between their technology and the advanced solutions developed by EVOTEC. Any failure to stay at the forefront of technological change and to develop and introduce products in response to changing market demands or customer requirements could have a material adverse effect on the Company s business, financial situation and results of operations. To date the Company has only been able to complete one operational prototype (Mark I) of its drug discovery platform (EVOscreen). While this presents a major technological break-through for the Company, the Company s collaboration partners are now expecting delivery of an advanced version (Mark II) of EVOscreen. While most of the technological difficulties in respect of the EVOscreen system have been solved in connection with the development of Mark I, a number of improvements concerning, for example, the robustness of automation, nano liquid handling and cellular assay capacity, require advanced technical solutions which are still in the process of being developed. A further example of improvements under development is the plates carrying the wells into which reagents, targets and compounds are introduced in preparation for screening, so called Nanocarriers. Until recently, the Nanocarriers used in the screening process by EVOTEC were made from high quality glass with the result that they were very expensive to manufacture. In August 1999 the Company switched to newly developed, proprietary, inexpensive, disposable Nanocarriers, based on plastic material with a glass bottom plate. The new Nanocarriers have been tested successfully over the last two months, but there can be no assurance that the outcome of long term stress tests will be positive or that the new Nanocarriers will prove suitable for all applications for which the high quality glass plates were hitherto used. A failure to perfect the EVOscreen Mark II system and to deliver it to its collaboration partners would be a major set-back to EVOTEC and would impair its reputation in the industry, in addition to causing financial damage since milestone payments might be delayed or cancelled. Even if the Mark II system is successfully completed, it may not achieve the desired results, be uneconomical to produce, or fail to achieve expected performance levels. There can be no assurance that the Company will be able to successfully develop, manufacture and market EVOscreen (Mark II) or any other products and services, achieve anticipated performance levels or Throughputs, gain industry acceptance of the Company s products and services or develop a profitable business. The failure to achieve any of these objectives would have a material adverse effect on the Company s business, financial situation and results of operations. Restrictions on the Use of the Company s Proprietary Technologies The Company s technology platform, EVOscreen, has been developed under technology development and transfer agreements with its collaboration partners NOVARTIS and SMITHKLINE BEECHAM (see Business Description Licensing and Collaboration Agreements ). Pursuant to these agreements and to the collaboration agreement with PFIZER the Company is subject to certain restrictions which limit the ability of the Company to otherwise exploit and obtain commercial benefits from its technology. The Company may for a period of three years from the delivery of the respective EVOscreen systems under the collaboration agreements provide the EVOscreen technology only to a limited number of third parties active in pharmaceutical research. It is restricted in using the technology with the aim of developing pharmaceutical substances (except for in-house research) and in the number of targets per year that can be developed per customer and in total. In addition, the Company would have to pay royalties to NOVARTIS from the sales resulting from collaborations with third parties in the area of pharmaceutical research. These provisions limit the ability of the Company to market the EVOscreen hardware and software to other pharmaceutical companies. The Company has developed new strategies such offering screening services, developing its own validated targets and compounds and conducting research and development activities outside the area covered by the EVOscreen core technology. In addition, EVOTEC uses the restricted technology for activities outside the area of pharmaceutical research, such as analytical and diagnostic applications which are not covered by the technology development and transfer agreements with its collaboration partners. It remains to be seen whether the areas in which the Company is able to commercially exploit its technology are large enough for it to eventually generate profits. The Company anticipates that because it is unable to deliver the complete EVOscreen system to customers other than collaborators due to the arrangements with its collaboration partners, some pharmaceutical companies which otherwise would be potential customers for the Company s services may abstain from using EVOscreen technology. This may hold true in 18

28 particular for those customers which are unwilling to outsource the screening process in order to protect their compound libraries from third party access. Such customers are likely to turn to competitors which are able to deliver screening equipment for use on the customer s premises. The restrictions on the use of the Company s technology could therefore have a material adverse effect on the Company s business, financial situation and results of operations. Risks associated with the Development and Commercialisation of Targets and Compounds The Company expects that a substantial portion of its revenues will be derived from the licensing of targets and/or compounds and validated lead/target products which have been identified using its proprietary technology to pharmaceutical companies. The Company s success in this business sector will, however, depend on whether the Company is able to gain access to promising targets for further development and access to compound libraries of sufficiently large quantity and quality. Should the Company be unable to find further academic or commercial collaboration partners willing to provide access to their targets and compound libraries the Company will be dependent upon its own research and on purchases of compounds on the market. Due to the limited resources of the Company and the doubtful quality of some publicly available compound libraries, there is a risk that the Company will be unable to identify targets and promising lead compounds which can be developed into pharmaceutical products. Even if the Company should be able to identify such compounds, it anticipates that considerable time will be required before any products arising from its technologies are brought to the market. Such products will require significant additional development, clinical testing and investment prior to commercialisation. Results of preclinical studies are not necessarily indicative of results that may be obtained in human clinical trials and results in early human clinical trials may be different from those obtained later in controlled multi-centre human clinical trials. Adverse or inconclusive results from preclinical testing or clinical trials could significantly delay, or ultimately preclude, the introduction, development or further testing of certain products and technologies. While the strategy of the Company is to use its developed technologies primarily to identify and validate targets as well as to identify and optimise compounds, the Company s receipt of revenues such as royalty and milestone payments will depend on the successful development and commercialisation of the products by its collaborators who bring products and technologies to the market. If the Company s collaboration partners fail to bring drugs developed from the Company s technologies to the market and gain commercial acceptance of such drugs this would have a material adverse effect on the Company s business, financial situation and results of operations. In addition, pharmaceutical and biotechnology companies, academic institutions, governmental agencies and other research organisations, either on their own or in collaboration with others, are conducting research and developing products in various areas which compete with the Company s technology platform, including research to identify suitable targets and compounds. Lack of Sales and Marketing Experience; International Sales and Operations The Company has limited experience in direct marketing, sales or distribution and in providing service and support for its products. The Company s future profitability will depend on its ability to build a team of marketing experts with the requisite technical skills to sell its products and services to pharmaceutical and biotechnology companies, to provide adequate after-sales service and to negotiate licensing and collaboration agreements on commercially reasonable terms. The Company s products are technical in nature and the Company therefore believes it is necessary to employ people with scientific expertise and relevant experience in the areas at screening, preclinical drug development and analytical instruments. Competition for employees with such skills is intense. There can be no assurance that the Company will be able to attract and retain sufficient qualified sales and service people or that the Company will be able to build an efficient and effective sales, marketing and support department. Failure to attract or retain qualified people or to build such a department would have a material adverse effect on the Company s business, financial situation and results of operations. The Company expects that international sales will account for a significant portion of the Company s total revenues. The Company currently has no facility in the US, but intends to establish a branch or subsidiary in the US to provide screening services in the near future. International sales and operations are subject to a number of risks, including the imposition of government controls, political and economic instability or conflicts, trade restrictions, changes in tariffs and taxes, difficulties in staffing and managing international operations, problems in establishing or managing distributor relationships and general economic conditions. In addition, as the Company expands its international operations, it may be required to invoice its sales in local currencies. Consequently, fluctuations in the value of foreign 19

29 currencies relative to the EURO may adversely affect the Company s business, financial situation and results of operations. Competition The market for screening products and services is highly competitive. The number of companies which offer screening services has greatly increased over the past two or three years and prices for such services have fallen. The Company expects that competition will continue to increase significantly as more biotechnology and pharmaceutical companies adopt High-Throughput Screening instruments as a drug discovery tool and as new companies enter the market with advanced technologies. In addition, pharmaceutical and biotechnology companies, academic institutions, governmental agencies and other research organisations are conducting research and developing products in various areas which compete with the Company s technology platform. Many of these competitors have greater financial, operational, sales and marketing resources than the Company and some may also have more experience in certain areas at research and development. The Company s technological approaches may be rendered obsolete or uneconomical by advances in existing technological approaches or the development of different approaches by one or more of the Company s current or future competitors. Management of Growth The Company s success will depend on the expansion of its operations and the effective management of growth, which will place a significant strain on the Company s management, operational and financial resources. To manage such growth, the Company must expand its facilities, augment its operational, financial and management systems and hire and train additional qualified personnel. The Company s failure to manage growth effectively would have a material adverse effect on the Company s business, financial situation and results of operations. Dependence upon Key Personnel; Need to Recruit Additional Qualified Personnel The Company s success will depend to a significant degree upon the continued services of key management, technical, and scientific personnel and on its ability to attract and retain other highly skilled personnel. Competition for qualified personnel is intense, particularly in the areas of information technology and medicinal chemistry, and the process of hiring suitably qualified personnel is often lengthy. There can be no assurance that the Company will be able to recruit such personnel. The Company s management and other employees may voluntarily terminate their employment with the Company at any time with short notice. The standard contract of employment used by the Company for most employees, including key personnel, does not include any non-competition clauses upon termination of employment with the Company. Due to the wide ranging activities of the Company covering chemistry, biochemistry, biology, physics, information technology and other fields, the Company has only a limited number of experts in each field. Should one of these experts leave the Company or decide to stop co-operating with the Company, this could have a severe negative impact on the operations of the Company. The loss of the services of key personnel, or the inability to attract and retain additional qualified personnel, could also have a material adverse effect on the Company s business, financial situation and results of operations. Dependence on Suppliers and Contract Manufacturers Certain components used in the Company s screening instruments are currently purchased from a single or a limited number of outside sources. The reliance on a sole or limited number of suppliers could result in time delays associated with redesigning a product due to the failure to obtain a single source component, an inability to obtain an adequate supply of required components and reduced control over pricing, quality and timely delivery. Any interruption in the supply of single source components could have an adverse effect on the Company s business, financial situation and results of operations. In order to complete the EVOscreen Mark II system the Company will to a large extent rely on outside manufacturers and standard parts. The Company has only very limited experience in controlling the manufacturing process at the subcontractor level and in integrating standard components into its system. Unforeseen difficulties in the development of the Mark II system, have led to delays in completion which in turn have prevented the Company from meeting certain milestones agreed with its collaboration partners. 20

30 Future Capital Needs; Uncertainty of Additional Funding The Company may be required to raise substantial additional capital over a period of several years in order to develop and commercialise its products and services. The Company s future capital requirements will depend on numerous factors, including the costs associated with developing and commercialising its products, building a team of marketing experts, direct marketing and sales force, maintaining existing, or entering into future, licensing and distribution agreements, protecting intellectual property rights, expanding facilities and consummating possible future acquisitions of technologies, products or business. The Company may consume available resources more rapidly than currently anticipated, resulting in the need for additional funding. The Company may be required to raise additional capital through a variety of sources, including the public equity market, private equity financing, collaborative arrangements, and public or private debt. There can be no assurance that additional capital will be available on favourable terms, if at all. If adequate funds are not available, the Company may be required to significantly reduce or refocus its operations. To the extent that additional capital is raised through the sale of equity, the issuance of such securities could result in ownership dilution to the Company s existing stockholders. Risks Associated with Potential Acquisitions of Technologies and Businesses The Company may acquire certain technologies, products or businesses to expand its existing and planned product lines and technologies. Such acquisitions would expose the Company to the risks associated with the assimilation of new technologies, operations, sites and personnel, the diversion of resources from the Company s existing business and technologies, the inability to generate revenues to offset associated acquisition costs, the maintenance of uniform standards, controls, and procedures and the impairment of relationships with employees and customers as a result of any integration of new management personnel. Acquisitions may also result in the issuance of dilutive equity securities, the incurrence or assumption of debt or additional expenses associated with amortisation of acquired intangible assets or potential businesses. The Company s failure to address successfully such risks could have a material adverse effect on the Company s business, financial situation and results of operations. Intellectual Property Risks The Company s success will depend in part on its ability to obtain patents, maintain trade secret protection and operate without infringing the proprietary rights of others. At present, the Company s intellectual property portfolio consists of 63 patent families and two utility models which are described in detail in Business Description Patents and Intellectual Property. Some of these patents and patent applications are the result of the Company s strategy to constantly monitor the research activities and results of in-house research facilities in order to quickly and reliably identify potentially patentable technical contributions. However, certain of these patent families have been acquired or in-licensed on an exclusive basis from various outside researchers, academic institutions and companies. Certain other rights have been licensed on a non-exclusive basis, and therefore could be or are licensed to others. In cases where projects of the Company or its collaborators are funded by governmental research grants, the Company tries to gain exclusive access to the results as far as it appears reasonable for commercial or other reasons. However, there can be no assurance that the Company would be able to gain such exclusive access. In so far as technologies have been in-licensed or acquired by the Company from third parties, the Company usually has to pay lump-sum fees as well as royalties based on sales of products that incorporate the respective technology and, in addition, expenses associated with patent prosecution and maintenance. Usually, the licence may be terminated in the event of a material breach by the Company. In such case, the Company would lose the right to incorporate the respective technology into its products and would be required to either license or develop alternative technologies. There can be no assurance that the Company would be able to obtain licences for alternative technologies on commercially reasonable terms, if at all, or that the Company would be capable of developing such technologies. The Company and its patent attorneys periodically monitor the rights of third parties. A risk inherent in any such searches is that search results may be inconclusive. The searches will bring to attention only those patents and patent applications indexed by the keywords and classification marks used in 21

31 the searches. Relevant patents and patent applications not indexed by those keywords or classification marks may only be found by more extensive searches or may not be practicable to find at all. Furthermore, searches will not reveal patent applications pending, which are not yet published at the date of the search. In the event that any relevant claims of third party patents are valid and enforceable, the Company could be prevented from utilising the subject matter claimed in such patents, or would be required to obtain licences from the patent owners of each of such patents or to redesign its products or processes to avoid infringement. There can be no assurance that such licences would be available on commercially reasonable terms, if at all, or that the Company would be successful in any attempt to redesign its products or processes to avoid infringement. If the Company does not obtain the necessary licences, it could be subject to litigation and encounter delays in product introductions while it attempts to design around such patents. Alternatively, the development, manufacture or sale of such products could be prevented. Litigation would result in significant cost to the Company as well as diversion of management time. Adverse determinations in any such proceedings could have a material adverse effect on the Company s business, financial situation and results of operations. To the best of its knowledge, and based on legal advice from its patent attorneys, the Company is not aware of any third party rights which are currently infringed by the products of or the services performed or offered by the Company in so far as these relate to the Company s technologies. However, the Company is aware of two instances where it may be required to obtain a licence from third parties in the future. Firstly a licence will be required if EVOTEC intends to produce a certain digital signal processor for use in connection with its FCS detection technology. Secondly, a licence will be required if the Company intends to perform or market in the US homogeneous high throughput assays on suspended cells or solid supports using confocal microscopy (see Business Description Patents and Intellectual Property ). When performing services for or supplying third party technology to clients, EVOTEC tries to minimise the risks associated with the infringement of third party rights contractually by obtaining appropriate indemnities from such clients. Any patent infringement action against the Company could result in the Company having to pay damages and being restricted from undertaking commercial activities relating to the affected technologies. Should the Company be required to engage in interference proceedings in the United States or opposition proceedings in Europe (See Business Description Patents and Intellectual Property ) or other challenges to its patent rights or intellectual property rights made by third parties, or to bring such proceedings or enforce any patent rights against third parties, this could have a material adverse effect on the business, financial situation and results of operations of the Company. Currently, the Company is faced with two oppositions filed by BASF AG. The first opposition is against the main European patent in the area of FCS detection technology and alleges lack of novelty citing a scientific article. This document was held not relevant during the examination process. Therefore, based on legal advice from its patent attorneys, the Company believes that the opposition of BASF AG is without foundation. Furthermore, EVOTEC has commenced negotiations with BASF AG in order to reach a settlement. If, however, the negotiations fail and the opposition of BASF AG were to be successful in its entirety, the patent would be revoked. This could have an adverse effect on the business, financial situation and results of operations of the Company. The second opposition is against a European patent held by EVOTEC in the area of optimisation of molecules and was only filed recently. EVOTEC and its patent attorneys have not yet had sufficient time to assess the merits of the opposition which alleges lack of novelty. However EVOTEC has approached BASF AG with a view to negotiating a settlement. Should the negotiations fail and the opposition of BASF AG be successful in its entirety, the patent would be revoked. This could have a material adverse effect on EVOTEC s business, financial situation and results of operations. The patent positions of biotechnology companies in general are uncertain and involve complex legal and factual questions. In addition, the coverage claimed in a patent application can be significantly reduced before the patent is issued. Consequently, there can be no assurance that the patent applications of the Company or its licensors will result in patents being granted or that any granted patents will provide protection against competitive technologies or will be held valid if challenged. Others may independently develop products similar to those of the Company or design around or otherwise circumvent patents held or in-licensed by the Company. 22

32 The Company also relies on trade secrets and copyright law and on employee and third party nondisclosure agreements to protect its intellectual property rights in its products. There can be no assurance that these agreements and measures will provide protection of the Company s trade secrets, copyright, know-how or other proprietary information in the event of any unauthorised use to a significant extent or that others will not independently develop substantially equivalent proprietary technologies. Litigation to protect the Company s trade secrets or copyright would result in significant cost to the Company as well as diversion of management time. Adverse determinations in any such proceedings or unauthorised disclosure of the Company s trade secrets could have a material adverse effect on the Company s business, financial situation and results of operations. In addition, the laws of certain foreign countries do not protect the Company s intellectual property rights to the same extent as the laws of Germany, other countries of the European Union or the US. There can be no assurance that the Company will be able to protect its intellectual property in other markets. Collaboration with Academic Institutions The Company has in the past benefited to a considerable extent from the research conducted at academic institutions with whose scientific personnel the Company collaborates. The Company has been able to enter into contractual arrangements (including exclusive access agreements) with certain scientists (see Business Description Academic Alliances ). The scientific personnel and/or academic institutions involved in such collaborations may have rights to certain products and technologies discovered and developed, including intellectual property rights and the right to claim reimbursement of costs incurred in connection with such discovery and development. It has been the Company s experience that the European academic institutions with whose scientific personnel it collaborates only occasionally exercise such claims to discoveries and developments made by or in collaboration with their scientific personnel. There can be no assurance, however, that the policy and practices of such European academic institutions will not change. In addition, there can be no assurance that the academic institutions will continue to collaborate with the Company to the same extent in the future. The collaborations at present are largely based on personal ties between scientists of the Company and the academic institutions from which they graduated before joining the Company. As these personal ties may become less important over time, the ability of the Company to find academic collaborators will depend more on the quality of its research and the benefits that external scientists derive from the collaboration with the Company. There can be no assurance that the Company will continue to be able to attract academic institutions of the same quality to collaborate with it in the future and that competition for collaboration with such scientists will not increase. Special Interest Groups and Adverse Public Opinion The Company is involved in recombinant DNA engineering. This can attract the attention of special interest groups and adverse public opinion. Since its incorporation, the Company has had no negative contact with any such special interest groups and it is not aware of any circumstances where it has been the subject of adverse public opinion. However, there can be no assurance that such groups will not in the future become interested in the Company s activities and of its licensees or collaborators or that any adverse public opinion will not affect the operations of the Company. Regulatory Risk The Company operates in a highly regulated environment characterised by continual changes in the governing regulatory framework. There can be no assurance that any future changes of applicable regulations will not require further expenditures by the Company or the alteration, suspension or cessation of its operations in certain areas, or even in their entirety. The Company may in the future consider applying for a licence to handle substances for which an additional regulatory licence under the German Genetic Technology Act is required. The additional safety precautions and procedures which would then have to be implemented may impose a substantial financial burden on the Company. The production and marketing of therapeutic and diagnostic products based on the Company s products and technologies and the research and development activities required to bring these products to the market are subject to governmental regulation in most countries, especially in the major markets for pharmaceutical and diagnostic products (i.e. the European Union, the US, Canada and Japan). Regulators control, inter alia, testing procedures and the production and marketing of products. 23

33 Products developed under a licence or collaboration agreement by a licensee, collaborator or by the Company itself, or to which the Company may have rights, must first undergo an extensive regulatory approval process. This process can often last many years and necessitate the expenditure of substantial sums. Varying interpretations of the results obtained from preclinical and clinical tests could delay, limit or even prevent regulatory approval. In addition, delays or rejections could arise from changes in product approval regulations implemented during the product development stage. The Company s strategy is to delegate to its licensees and collaborators primary responsibility for developing marketable products and, accordingly, for obtaining the requisite regulatory approvals. The progress of development and regulatory approval could, nevertheless, have an impact on the Company s revenues, including its fees, royalties and milestone payments. There can be no assurance that regulatory approvals will be forthcoming for any product or technology developed by a licensee, collaborator or by the Company itself, or in relation to which it has rights. The non-compliance with applicable regulations could, inter alia, lead to the imposition of administrative fines, judicial injunctions and contractual penalties. It could also lead to the partial or blanket revocation of regulatory approvals, the non-processing of applications already filed, the suspension of proceedings, the revocation or confiscation of products, the imposition of production restrictions or the initiation of criminal proceedings. Any of these actions would have a material adverse effect on the Company s business, financial situation and results of operations. The Company is also subject to numerous federal, state and local laws relating to safe working conditions, manufacturing practices, environmental protection, and the storage, use and disposal of hazardous or potentially hazardous substances. Any material failure to comply with such laws could require the Company to incur significant costs and would have a material adverse effect upon the Company s ability to do business. Changes in existing requirements or the adoption of new requirements or policies relating to government regulations could materially and adversely affect the ability of the Company to comply with such requirements. Hazardous Materials The Company s research and development and manufacturing operations involve the use of hazardous materials, biological samples, chemicals and various reagents, some of which contain hazardous materials including carcinogens. The Company is subject to federal, state and local laws and regulations governing the storage, use and disposal of such materials and certain waste products. The risk of accidental contamination or injury from the use of these materials cannot be completely eliminated. In the event of an accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company, which would have a material adverse effect on the Company. The Company may incur substantial costs in complying with environmental regulations should the Company develop its own commercial reagent manufacturing facility. Dependence on Public and Health Care Spending Although the Company regards fees, royalties and milestone payments from pharmaceutical and biotechnology companies as its major source of income, it is also dependent, both directly and indirectly, upon the financial condition of public treasuries, governmental health authorities, research institutions, private health insurers and other organisations. Since its inception, the Company has profited from various governmental research grants. Whether the Company or its academic collaborators will continue to be able to attract such grants depends not only on the quality of the Company s projects, but also on general spending patterns of public institutions. Due to the strained financial situation of state treasuries in Europe as well as a general decrease in the level of governmental spending allocated to health care and research science, a risk exists that these grants could be substantially reduced or even eliminated. Furthermore, the ability of the Company s licensees and collaborators, and of the Company itself, to successfully exploit the products resulting from its technologies depends in part on the extent to which reimbursement for the cost of these products is available from governmental health administrations, private health insurers and other organisations. Governmental and other third party payers are increasingly seeking to contain healthcare costs and reduce the price of medical products and services. If adequate reimbursement levels are not provided for, the products developed by the Company or its collaborators, sales of these products and, in turn, the Company s revenues could be adversely affected. 24

34 Product Liability and Insurance The manufacture and sale of products involves an inherent risk of product liability claims and associated adverse publicity. A successful product liability claim brought against the Company in excess of its insurance coverage could have a material adverse effect on the Company s business, financial situation and results of operations. The Company currently has product liability insurance with limited cover of up to DM 5 million for personal injury and property damage. There can be no assurance that the Company will be able to maintain product liability insurance on acceptable terms, if at all, or that such insurance will provide adequate coverage against potential liabilities. Furthermore, an inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could prevent or inhibit the commercialisation and development of the Company s products. Control by Management and Existing Shareholders Upon completion of the Offering, the Company s principal shareholders, executive officers and directors together beneficially own approximately 24.2% of the outstanding Shares (22.9% if the Managers Over-allotment Option is exercised in full). As a result, these shareholders will be able to control matters requiring approval by the shareholders of the Company, including approvals of amendments to the Company s Articles of Association, mergers, a sale of all or substantially all of the assets of the Company, and fundamental transactions (see The Offering Shareholders Prior to the Offering ). Absence of a Public Market, Determination of the Offer Price, Share Price Volatility, Future Sale of Shares and the Neuer Markt In connection with the Offering, the admission of the Company s entire capital to the Regulated Market for trading on the Neuer Markt of the Frankfurt Stock Exchange (Frankfurter Wertpapierbörse) was applied for on 14 September Trading on the Neuer Markt is expected to commence 10 November Prior to the listing of the Offer Shares, there was no public market for the Company s shares. The Offer Price of the Offer Shares was set by the Global Co-ordinators jointly with the Company. There can be no assurance that the Offer Price will correspond to the price at which the Offer Shares are actually traded or that an active market for the Offer Shares will subsequently develop or continue to exist. The price of the Offer Shares could be subject to significant fluctuations by reason of changes in the Company s earnings situation or that of its competitors, the general situation in the industry, overall economic situations or situations in the financial markets. In recent years, securities markets in Germany and worldwide have seen substantial volatility in prices and trading volumes. Such volatility in the future could have a negative impact on trading in the Company s shares, irrespective of the Company s results of operation and financial position. The Company s shares will be traded in the Neuer Markt of the Frankfurt Stock Exchange, a market segment created in March 1997 for emerging innovative enterprises. The shares of companies quoted in this segment, many of which operate in very specific markets, generally carry a pronounced risk profile and are of a speculative character. Therefore, share prices and trading volumes in the Neuer Markt have been subject to strong fluctuations in the past, which in many cases have been unrelated to the affected Company s financial performance. The Neuer Markt has also seen high volatility of share prices for individual companies. There can be no assurance that strong price fluctuations of biotechnology stocks or other stocks quoted on the Neuer Markt will not impact on the price of the Company s shares. Following the Offering, the Company s shareholders prior to the Offering hold 63% (on the assumption that they do not purchase shares in the Offering and 59% if the entire Over-allotment Option granted to the Global Co-ordinators is exercised) of the Company s capital stock. The shareholders prior to the Offering have agreed not to dispose of their shareholdings in the Company without the consent of Deutsche Börse AG for a period of at least six months after the Offering commences (see The Offering Lock-up Agreements. ) Upon the expiry of this period, the majority of the shareholders prior to the Offering are free to dispose of their shares. Should shareholders exercise their rights to dispose of shares, this could depress the market price for the shares. 25

35 Absence of Dividends and Dilution of Shareholdings The Company has never made a dividend distribution. Distributions are unlikely for the foreseeable future and are not presently contemplated by the Company. (See Use of Proceeds, Capitalisation and Dividend Policy ). In the event that the options and warrants to subscribe for the Company s Shares are exercised, a dilution will occur (see Business Description Management and Employees ). A further dilution of shareholdings will occur upon exercise of outstanding and issued options and warrants for shares in the Company. Year 2000 Effect on Computer Systems Many data processing systems are programmed to accept years as only two-digit fields. By the turn of the century at the latest, four-digit year entries must be used in order to differentiate date information of the 21st century from that of the 20th century. As a result, the data processing systems used by many companies must be modified or replaced in order to meet the requirements for the Year 2000 ( Y2K ). Such problems could arise with respect to the electronic data processing programmes of the Company, its suppliers or customers. The Company has taken the following steps to avoid disruption of its operations resulting from the year 2000 problem: In the third quarter of 1998 a Y2K project team consisting of three members of the IT and finance departments was appointed. The first step of the project plan was to identify the critical products and, where required, obtain Y2K compatible updates. EVOTEC then sent questionnaires to its suppliers and partners in order to ensure that they were capable of performing beyond the year Moreover, EVOTEC has adopted guidelines in relation to the development of software and hardware, which ensure that no Y2K problems will arise in respect of EVOTEC s products. Y2K tests have been carried out on all products that were not guaranteed as Y2K compatible by the manufacturer. Measures to protect against Y2K problems were completed in August However, there can be no assurance that some disruption will not occur at the Company. Furthermore, it cannot be ruled out that as a result of disruption at the Company s suppliers or customers, the delivery of goods or services to or by the Company will either be delayed or fail to be delivered in the manner required. Such occurrences could have a negative impact on the Company s business, financial situation and results of operations. Reliability of Opinions and Forecasts The opinions and projections contained in this Prospectus are exclusively those of the Company and its management. Opinions and projections are all statements using such terms as expects, believes, anticipates, is of the opinion and similar wording. Such opinions and projections are based solely on information available to the Company and its management and on a number of assumptions which may or may not turn out to be correct. While they accurately reflect the present opinion of EVOTEC and its management with respect to possible future events, they are uncertain and subject to risk. A variety of factors may cause actual developments to deviate substantially from the opinions and projections of the Company and its management, including those being made regarding the Company s financial position, profitability and patent situation. Potential investors are cautioned against relying on these opinions and projections. The Company has not undertaken to make any future examinations of the opinions and projections contained herein or to adjust them to future developments. 26

36 MANAGEMENT S DISCUSSION AND ANALYSIS OF EVOTEC S FINANCIAL POSITION AND EARNINGS The discussion below should be read in conjunction with the consolidated annual accounts of the Company for financial years 1996 (unaudited), 1997 and 1998 and the unaudited interim financial statements for the six month periods ended 30 June 1998 and 1999 and the seven month periods ended 31 July 1998 and 1999, which have been prepared in accordance with US GAAP. The financial statements are included in this prospectus. The discussion below may contain certain forward looking statements that are based on beliefs of the Company s management, as well as assumptions made by, and information currently available to it. The Company s future results, performance or achievements could differ materially from those expressed in or implied by any such forward looking statements. In the section Risk Factors a number of factors are set out that could cause or contribute to such material differences. From the US GAAP CONSOLIDATED BALANCE SHEETS (figures in DM thousands) As at 31 December As at 30 June (unaudited) (unaudited) (unaudited) Summary Balance Sheet Data Total current assets... 5,739 6,886 42,009 38,774 39,692 Fixed assets, net... 2,053 3,315 9,543 7,899 11,144 Other non-current assets, net... 1, Investment in affiliated company Total assets... 8,953 10,454 52,034 47,034 51,460 Total current liabilities... 7,601 7,340 8,044 9,666 14,908 Stockholders loan ,400 7, Liabilities to silent partners... 11,800 12, ,400 0 Long-term loan ,750 4,375 8,125 Deferred revenues , ,350 0 Other non-current liabilities Total liabilities... 19,407 23,583 24,987 27,798 23,044 Total stockholders equity (deficit) (10,454) (13,129) 27,047 19,236 28,416 Total liabilities and stockholders equity... 8,953 10,454 52,034 47,034 51,460 27

37 From the US GAAP CONSOLIDATED STATEMENTS OF OPERATIONS (figures in DM thousands) Year ended 31 December Six months ended 30 June (unaudited) (unaudited) (unaudited) Results of Operations Revenue: Research and development revenue... 5,112 13,025 13,145 5,060 3,648 Product sale revenue , Total revenue... 5,112 13,810 14,294 5,355 4,383 Operating costs and expenses: Research and development expense... 5,187 11,401 16,200 7,831 11,449 Cost of product sales Selling, general and administrative expenses... 2,569 4,561 9,664 4,374 5,037 Total operating costs and expenses... 7,756 15,962 26,167 12,205 16,708 Loss from operations... (2,644) (2,152) (11,873) (6,850) (12,325) Other non-operating income (expense) 148 (502) ,144 Loss before income taxes and minority interest... (2,496) (2,654) (10,949) (6,343) (11,181) Income tax (expense) benefit... (16) (21) Minority interest Net loss... (2,512) (2,675) (10,932) (6,343) (11,163) From the US GAAP CONSOLIDATED STATEMENTS OF CASH FLOWS (figures in DM thousands) As at 31 December As at 30 June (unaudited) (unaudited) Net cash provided by (used in) operating activities 1,318 (15,753) (6,417) (10,641) Net cash used in investing activities... (2,765) (14,105) (10,521) (2,139) Net cash provided by financing activities... 2,000 55,040 42,308 4,175 Net increase (decrease) in cash ,182 25,370 (8,605) Cash and cash equivalents at beginning of year... 5,440 5,993 5,993 31,175 Cash and cash equivalents at end of year... 5,993 31,175 31,363 22, , 1997 and 1998 Results of Operations Since its inception in 1993, EVOTEC has devoted substantially all its resources to developing its proprietory technologies. Revenue has been generated almost exclusively from the collaboration and technology development agreements with NOVARTIS and SMITHKLINE BEECHAM, which were entered into in 1996 and pursuant to which the two pharmaceutical companies have substantially financed the development of EVOTEC s technology platform. As at 31 December 1998, approximately 68% of the contractual revenues from these agreements has been realised. EVOTEC has incurred losses in every year since its inception. Revenues In 1996 revenues of TDM 5,112 from the collaboration and technology development agreements with NOVARTIS and SMITHKLINE BEECHAM accounted for the majority of the total revenues. In 1997 revenues of TDM 13,025 from collaborative research and development accounted for 94% of the total 28

38 revenues and in 1998 collaborative revenues of TDM 13,145 accounted for 92% of the total. Revenue under these agreements typically consists of licence fees, research payments and success payments payable on attaining specified milestones. Licence fees are recognised pro rata over the relevant forecast research period to the extent that they serve to cover the Company s ongoing research and development activities. Research payments, are also recognised pro rata over the relevant forecast research period. Success payments are paid when certain research and development milestones are achieved. Recognition of revenue takes place during the period in which the milestone was successfully achieved and not on receipt of payment. Operating Costs and Expenses In all three financial years from 1996 to 1998 the largest operating cost and expense items were research and development expenses. They increased from TDM 5,187 in 1996 by 119.8% to TDM 11,401 in 1997 and by 42.1% to TDM 16,200 in 1998, (and are stated net of public grants received by the Company for research and development purposes). The large increase in these expense items is largely due to the research and development activities required under the collaboration and technology development agreements with NOVARTIS and SMITHKLINE BEECHAM, which were concluded in April 1996 and November 1996, respectively. In 1997 and 1998 the bulk of the research and development costs relating to the EVOscreen technology platform were incurred and research and development expenses compared to 1996 increased accordingly. In 1998 research and development costs rose substantially faster than revenues from research and development, due to EVOTEC s revenues in this development phase being largely based on success payments which were achieved only upon completion of a defined development step. In addition, the Company agreed an extension into 1999 for the development phase B under the collaboration and development agreement with SMITHKLINE BEECHAM. As a result, the realisation of an important milestone did not take place in 1998, but is expected to be achieved in the course of Selling, general and administrative expenses increased by 77.5% from TDM 2,569 in 1996 to TDM 4,561 in 1997 and by 111.9% to TDM 9,664 in Almost all expense items included under this category have steadily increased from 1996 to Substantive additions were made to the marketing, business development and administrative staff, which led to an increase in corresponding personnel costs and a large increase in the costs associated with the recruitment of qualified personnel. Recruitment expenses alone accounted for more than TDM 470 in Other non-operating income (expense) Other non-operating income (expenses) comprises net interest and one off adjustments such as, for example, an asset write-off and a foreign exchange transaction loss. The fluctuations in this are due to factors specific to each year. In 1997 an asset-impairment write-off in the amount of TDM 708 for licences and patents affected non-operating income. The extraordinary write-off had become necessary due to the restricted usability of certain patents and licences acquired by EVOTEC. In 1998 the increase in non-operating income was caused by a substantial rise in interest income flowing from the investment of the reserve capital from the capital increase in that financial year. Taxation Due to the substantial losses incurred by the Company it has built up operating loss tax credit carry forwards which will affect the amount of taxes the Company will pay in future financial years, if any. In accordance with US GAAP, these tax credits for the years 1996 to 1998 are not taken into account in the statement of operations of the Company since it depends upon several factors whether the Company will in fact be able to benefit from these loss carry forwards. This will only be the case if the Company is able to generate profits which can be set off against the losses for tax purposes. Liquidity and Capital Resources Since EVOTEC s inception it has funded its operations primarily through cash generated from operations, debt and contributions by silent partners and shareholders. In 1998 EVOTEC completed a capital increase generating approximately DM 38.7 million in cash. In 1997 EVOTEC generated net cash of TDM 1,318 from operations. However, in 1998 it used net cash of TDM 15,753 in operations. Several factors contributed to this, in particular the rise in net loss due to the disproportionate increase in operating expenses and the increase in stock necessary for the completion of the EVOscreen system, as well as increases in accounts receivable which also related to 29

39 the collaboration and technology development agreements with NOVARTIS and SMITHKLINE BEECHAM. Cash flow used in investment activities increased by 410% from TDM 2,765 in 1997 to TDM 14,105 in In 1998 the Company invested TDM 9,120 in fixed assets. A large part of this investment was in connection with the move to new premises in financial year The Company invested TDM 1,600 in improvements to buildings, TDM 2,200 in new technical equipment and machinery in laboratories and TDM 3,600 in office furniture, data processing equipment and other hardware. In addition, the Company invested TDM 4,577, which formed part of the proceeds of the capital increase from a private placement, in investment securities. Net cash provided by financing activities amounted to TDM 2,000 in 1997 and TDM 55,040 in TDM 38,661 cash was raised through a capital increase which was registered in the commercial register on 28 May Cash flow of TDM 10,000 was generated by the disbursement of a loan from a bank partly guaranteed by a government agency (Kreditanstalt für Wiederaufbau). According to its terms, the loan is designated to finance the research and development activities of the Company. The loan bears interest of 5% p.a. and has to be repaid in twelve equal, bi-annual instalments of TDM 625 each. The Company intends to reserve a portion of the proceeds from the Offering for early repayment of the loan in full or in part. As security for the loan, the Company has pledged certain patents in favour of the credit provider (see Business Description Patents and Intellectual Property ). At the end of financial year 1998 the Company had cash and cash equivalents of TDM 31,175. In addition, the Company had at its disposal credit lines of TDM 250, none of which were used. The conversion of the silent partnerships into additional paid in capital mentioned in the supplemental schedule of non-cash financing activities to the cash flow statement relates to silent partnership agreements (Stille Gesellschaft) into which the Company entered with two of its shareholders in On 21 December 1998 the silent partners and the Company agreed to liquidate the silent partnerships. The silent partners contributions of TDM 12,400 were accordingly converted into shareholders equity. From the US GAAP CONSOLIDATED BALANCE SHEETS (figures in DM thousands) As at 31 July (unaudited) (unaudited) Summary Balance Sheet Data Total current assets... 36,229 41,290 Fixed assets, net... 8,157 12,011 Other non-current assets, net Investment in affiliated company Total assets... 44,848 53,868 Total current liabilities... 7,886 16,308 Liabilities to silent partners... 12,400 0 Long-term loan... 4,375 8,125 Deferred revenues... 1,200 3,208 Other non-current liabilities Total liabilities... 25,868 27,652 Total stockholders equity (deficit)... 18,980 26,216 Total liabilities and stockholders equity... 44,848 53,868 30

40 From the US GAAP CONSOLIDATED STATEMENTS OF OPERATIONS (figures in DM thousands) Seven months ended 31 July (unaudited) (unaudited) Results of Operations Revenue: Research and development revenue... 5,697 4,422 Product sale revenue ,239 Total revenue... 6,013 5,661 Operating costs and expenses: Research and development expense... 8,452 13,852 Cost of product sales Selling, general and administrative expenses... 4,869 6,064 Total operating costs and expenses... 13,321 20,317 Loss from operations... (7,308) (14,656) Other non-operating income (expense) 709 1,275 Loss before income taxes and minority interest... (6,599) (13,381) Income tax (expense) benefit Minority interest Net loss... (6,599) (13,363) From the US GAAP CONSOLIDATED STATEMENTS OF CASH FLOWS (figures in DM thousands) As at 31 July (unaudited) (unaudited) Net cash provided by (used in) operating activities... (8,717) (4,840) Net cash used in investing activities... (11,142) (3,326) Net cash provided by financing activities... 42,308 4,175 Net increase (decrease) in cash... 22,449 (3,991) Cash and cash equivalents at beginning of year... 5,993 31,175 Cash and cash equivalents at end of period... 28,442 27,184 Seven month period ended 31 July 1999 and 1998 (unaudited) The losses of the Company in the first seven months of 1999 of TDM 13,363 were greater than the losses in the same period of the previous year. This is based on the significant increase in R & D costs. The reduced revenues are due to the timing of the payments and receipt of revenues under the collaboration and technology development agreements with NOVARTIS, SMITHKLINE BEECHAM and PFIZER. The increase in costs is based primarily on the significant increase in staff in the first seven months of 1999 as compared to the corresponding period in the previous year (31 July 1998: 130, 31 July 1999: 202) as well as in the area of R & D and general and administrative expenses. The increased R & D expenses arise in connection with the further development of the EVOscreen system Mark II, the establishment of EVOTEC NeuroSciences GmbH as well as the EVOtarget project. The increase in staff was necessary for the extension and completion of the Company s technology platform. In the first seven months of 1999 the Company acquired fixed assets totalling TDM 4,544. This comprised mainly fixtures and fittings and purchases of laboratory equipment. Recent Pronouncements During 1998, the American Institute of Certified Public Accountants ( AICPA ) issued Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, SOP 98-1, which requires the capitalisation of internal use computer software as costs until certain criteria are met. The capitalised software costs will be amortized on a straight-line basis over the 31

41 useful life of the software. The company has adopted the statement with effect from January 1, The adoption of the statement is not expected to have a material impact on the company s financial statements. In April 1998, the AICPA issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities ( SOP 98-5 ). SOP 98-5 requires all costs associated with start-up activities or organisation costs to be expensed as incurred. SOP 98-5 is effective for financial statements of fiscal years beginning after 15 December The Company has adopted SOP 98-5 with effect from 1 January In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting of Derivative Instruments and Hedging Activities ( SFAS 133 ), which establishes accounting and reporting standards for derivative instruments, including those embedded in other contracts (collectively referred to as Derivatives ) for hedging activities. SFAS 133 requires that an entity recognise all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. SFAS 133 also sets forth the criteria for determining whether a derivative may be specifically designated as a hedge of a particular exposure with the intent of measuring the effectiveness of that hedge in the statement of operations. During June 1999, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No 137, Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB Statement 133 ( SFAS 137 ). The SFAS 137 defers the effective date of SFAS 133 to Management is evaluating SFAS 133 and has not yet quantified the impact of adoption of SFAS 137 on its financial statements. 32

42 HISTORY OF EVOTEC Developments before the incorporation of EVOTEC 1972 Elson, Magde and Webb were the first to develop Fluorescence Correlation Spectroscopy (FCS), but were unable to apply it to biochemical systems or as a screening tool due to, inter alia, insufficient performance of technical components and computer equipment at that time. mid 1970s early 1980s early 1990s Professor Rudolf Rigler published his first papers on single-molecule kinetics determined using FCS. Nobel Laureate Professor Manfred Eigen and Professor Rudolf Rigler recognised the significance of FCS for the quantification of molecular fitness based on single-molecule interactions and began to develop it as a tool for their evolutionary technology. Scientists in Professor Eigen s laboratory developed methods of evolving not only selfreplicating molecules like RNA and DNA, but also proteins. In 1992 Professor Eigen and Dr. Karsten Henco, who had gained substantial experience in the biotech industry as a co-founder and Managing Director of QIAGEN, decided to start a biotech company that would develop and commercialise products based on the application of EVOlutionary TEChnology. Due to public skepticism against recombinant DNA technology at the time, very little venture capital was available for a German biotech business. However, two medical doctors in Hamburg, Professor Freimut Leidenberger and Professor Heinrich Schulte, were so convinced by and committed to the Evo-Tec technologies that they managed to raise more than DM 12 million (USD 7.5 million) for the project. Incorporation of EVOTEC 1993 EVOTEC BioSystems GmbH was founded in Hamburg. Among the founders were Manfred Eigen, Karsten Henco, Ulrich Aldag, Freimut Leidenberger, Heinrich Schulte, Rudolf Rigler, Charles Weissmann and the Max-Planck Society for the Advancement of Science The Company became operational in its new premises in Hamburg. It was soon recognised that the selection technologies developed for molecular evolution in the laboratory would also be a means to search for and select new pharmaceutical drug compounds. EVOTEC won its first commercial contract from UNILEVER to develop speciality biochemicals and received two grants from the German Research and Technology Ministry, one concerning functional genomics, the other the screening of natural products EVOTEC founded EVOTEC Analytical Systems GmbH (EAS) as a separate subsidiary in Erkrath near Düsseldorf, in order to develop diagnostic applications for EVOTEC s detection technology EVOTEC entered into collaborations with NOVARTIS and SMITHKLINE BEECHAM with the objective of developing and refining FCS detection technology into an advanced ultra-high-throughput Screening system The Company expanded its management team. Alongside Karsten Henco, Jörn Aldag and Timm Jessen became managing directors of the Company EVOTEC succeeded in raising additional capital from venture capital companies in one of the largest private placements in Europe in the biotechnology area. Later in the year the first prototype of its ultra-high-throughput Screening system using EVOTEC s unique FCS and FCS + plus detection technology was completed. EVOTEC received a grant from the German Federal Ministry for Research and Technology for its lead role in and management of the pilot project (Leitprojekt) Validated Lead/Target Systems 33

43 EAS concluded a joint venture agreement with QIAGEN GmbH, Hilden to jointly develop diagnostic reagents, sample preparation kits and analytical devices for DNA/RNA diagnostics. The Company moved to bigger premises in an industrial area of Hamburg. It changed its status from a limited liability company to a stock corporation EVOTEC NeuroSciences GmbH was established. EVOTEC entered into a collaboration with PFIZER with the objective of further developing its ultra-high-throughput Screening system. EVOTEC goes public. 34

44 BUSINESS DESCRIPTION Overview EVOTEC BioSystems AG is a biotechnology company serving the life science industry. It designs and develops ultra-high-throughput Screening systems and offers products and services to increase the speed, accuracy and efficiency of the drug discovery process. The Company has a broad platform of proprietary technologies including its unique single molecule detection technologies (FCS and FCS + plus). The various read-out modes of the FCS + plus detection device provides scientists with comprehensive information on the characteristics of a compound, including its potential as a substance for further pharmaceutical development. In addition, the Company has developed technologies in connection with assay development for miniaturised and homogeneous biochemical and cell-based assays, robotics, nano liquid handling, on-bead screening as well as single bead and single cell handling and selection technologies and has integrated these proprietary technologies into an ultra- High-Throughput Screening system (EVOscreen). The Company believes that EVOscreen has significant advantages over conventional screening methods, including a substantial increase in throughput (up to 100,000 data points per instrument per day per EVOscreen system), higher data output per data point, greater sensitivity of the detection device, reduced assay volumes and corresponding savings in reagent costs. Collaboration partners of the Company in the development of EVOscreen include NOVARTIS and SMITHKLINE BEECHAM, with whom it entered into technology development and transfer agreements in relation to the EVOscreen technology in In 1999, a third such agreement was concluded with PFIZER. A prototype of the EVOscreen system (EVOscreen Mark I) was completed in It is the first fully integrated miniaturised screening system with a current throughput of up to 50,000 compounds per day. The Company expects to deliver an upgraded version of the system (EVOscreen Mark II) to its collaboration partners later this year and early next year. Potential customers for the Company s products and services are all firms which carry out research-based product development in the life sciences field. The Company is currently focusing on the pharmaceutical and biotechnology sectors. Additional potential markets for the Company include the agricultural and food sectors which are increasingly searching for new molecules to be used as insecticides, herbicides, food additives etc. A combination of factors, including price controls, shortening product life-cycles and greater competition is increasing the pressure on pharmaceutical companies to accelerate the rate at which they bring new drugs onto the market. As a result, pharmaceutical companies are seeking to increase the effectiveness of their R&D through (i) tools which allow an acceleration of the drug discovery process and (ii) increased outsourcing of research. The Company believes that the potential annual budget for external research in the pharmaceutical industry is more than USD 7 billion and that pharmaceutical companies spent USD 2 billion in research collaborations in The Company operates its business as four business units: (i) the Drug Discovery Technology unit collaborates with third parties to develop EVOTEC s platform technology (current technology collaborations include NOVARTIS, SMITHKLINE BEECHAM and PFIZER); (ii) the Drug Discovery Services unit which enters into service contracts with third parties to provide screening, assay development and other early drug- and target-characterisation services on a fee-for-service basis; (iii) the Drug Discovery Products unit will combine drug discovery targets from third parties with EVOTEC s technology platform to develop drug candidates for outlicensing to life sciences companies for further development; and (iv) the Instruments unit, which designs and sells instruments used in the drug discovery process. The Company s near-term focus is to grow its Drug Discovery Services business to become a leading provider of outsourced screening, assay development and other early drug- and targetcharacterisation services to the life sciences industry, while continuing to develop its platform technology by entering into a limited number of additional technology collaborations. Over the longer term, the Company will seek to capture more of the value created by its technology platform by obtaining targets and libraries for proprietary development, either alone or in collaborations with owners of such targets or libraries. Some of these activities may be carried out through separately financed and managed companies. As the manufacturing and marketing of instruments becomes more routine, the Company expects to outsource the Instruments business either to third parties or to separately financed and managed instrument companies. 35

45 Background Historically, drugs have been discovered either by modifying natural physiological processes, by a laborious process of screening natural compounds and chemicals for their effects on certain diseases, or purely by chance. In recent years, the drug discovery process has become more methodical with pharmaceutical companies developing large libraries of natural and synthetic compounds that are systematically screened against disease related targets in vitro. Target Identification Targets are specific biological molecules, such as enzymes, receptors or ion channels, thought to be relevant to a certain disease and its symptoms. Most drugs work by binding to a target, thereby affecting its biological function. Until recently most targets were discovered unsystematically. Developments in molecular biology and genomics have enabled a more focused approach leading to a dramatic increase in the number of putative pharmaceutical targets available for drug discovery. Today targets can be identified using various approaches: Genomics: In its basic form genomic research identifies genes, i.e. the sub-units of DNA containing the code for specific products in an organism, typically proteins. The mass sequencing of the human genome associated with genomic research has given a deeper understanding of the role of genes and the proteins expressed by such genes in the human body and the possible association of genes with specific diseases. A large number of human genes have now been identified and sequencing of the human genome is expected to be completed by the year Sequencing of pathogen genomics has produced numerous putative targets for antibiotics for the treatment of infectious diseases. Functional Genomics: The mapping and sequencing of genes alone gives only a limited indication of the possible functions that the proteins encoded by the genes may have in the human body. The huge scientific effort in the area of sequencing has to be followed by an even greater research effort to unravel the pathophsysiological role of the identified genes and their suitability as targets for therapeutic intervention. This area of research is referred to as functional genomics and may yield information on the role of certain genes in the development of diseases. Messenger RNA: Information on targets may also be obtained by observing differences in messenger RNA patterns. Messenger RNA serves as a template for the synthesis of proteins. Certain kinds of disease related defects, which may provide clues as to possible targets, are more easily detected in dysregulated messenger RNA than in genes themselves. Proteomics: Instead of analysing the gene itself or its messenger RNA, proteomic research has as its object proteins which are the products of gene expression. A comparison of cell proteins in healthy and diseased tissue may also provide information on potential targets for therapeutic intervention. Estimates suggest that in the human genome there are 100,000 to 120,000 different genes, each of which typically encodes one protein. Of these only 5,000 to 10,000 may serve as specific target molecules from which human therapeutic products may be developed. Scientists believe that the portfolio of existing drugs acts on only approximately 500 of these targets. The pharmaceutical industry is therefore urgently looking for technology able to enhance the process of target identification and validation. 36

46 Target Validation Not all molecules which have been identified as putative targets show the characteristics which make them suitable for pharmaceutical intervention. While a certain receptor may be associated with a disease, its role in the development of the disease can be so limited or its physiological functions so easily circumvented that compounds which modulate this receptor have no useful effect on the targeted disease. In order to exclude such targets from further development, pharmaceutical companies validate their targets before commencing further development of compounds. In target validation the physical properties of a target molecule, such as weight, protein structure or tissue/cellular location, are ascertained. Furthermore, its interaction with other molecules is studied. The more information which can be identified at this stage in relation to the characteristics of a target and its role in the pathophysiology of a disease, the less likely it is that futile targets are pursued. Compound Selection Once a target is chosen, compounds have to be selected for screening against the target. Traditionally, compounds were derived from natural sources or were synthesised by conventional methods (shelf compounds). It took pharmaceutical companies years to build up libraries of compounds using such methods. With the advent of combinatorial chemistry techniques, it is now possible to synthesise chemically diverse libraries with millions of compounds that can be screened against targets of interest. These advances in combinatorial chemistry have enabled industrial and academic groups to increase the supply and diversity of small molecules for screening. Millions of small molecules are now available to researchers to be screened for their activity on validated and novel targets. Combinatorial chemistry is not only used for de-novo synthesis of structurally novel compounds but also for the rapid provision of identified hits. Those directed libraries are then again screened against the target in order to identify an optimised hit. Assay Development An assay is any combination of targets and compounds which is exposed to a detection device to measure chemical or biological interaction. The aim of any assay development is to set the parameters so as to provide a model which identifies the most important factors of intermolecular activity in order to identify those compounds which affect a selected target in the desired manner. There are two fundamentally different types of assays: biochemical assays and cell based assays. Biochemical assays involve applying chemical compounds to purified molecular targets while cell based assays screen living cells for a certain response when exposed to chemical compounds. Cell based assays are sometimes more complicated to set up, but may deliver more physiological information, since processes in the cell are closer to those in the living organism to which therapeutic substances are to be applied. Detection devices used in assays are based on radioactivity, colorimetry, luminescence or fluorescence technologies. Since most of these techniques require some form of labelling, selecting and applying radioactive or fluorescent labels is also an important part of assay development. In addition, in order to allow comparisons between compounds and to yield useful results, assays have to be standardised and characterised. For High-Throughput Screening, and even more so for ultra-high-throughput Screening, the assay has to lend itself to downscaling and miniaturisation. Today, a well developed assay is homogeneous, i.e. it works on an add and measure basis, excluding washing cycles or separation steps and yields the maximum amount of information. The Company believes that pharmaceutical companies are therefore looking for assay development technologies and services which help to select the most useful and robust assay formats. Screening Screening is the application of an established assay format to compound libraries in mass testing. Until some years ago screening was a labour-intensive and time consuming process where an individual researcher would screen less than 100 compounds per day. Pharmaceutical and biotechnology companies sought to automate this process and are now operating with semiautomatic or automatic systems which are able to conduct screens for 10,000 compounds or more per day per system. Primary screens determine whether a compound leads to an appropriate biological reaction and is therefore a hit. Once a compound has been identified as a hit, researchers will try to evaluate its potency and specificity for the target and will modify the identified hit compounds in order to optimise the therapeutic potential to generate leads, optimised leads and, finally, drugs. To this purpose directed libraries, i.e. variations of the hit compound, are applied to the target in repeated primary screens. The dramatic increase in the numbers of compounds and targets available for screening has put pressure on pharmaceutical companies to accelerate the screening process and to enhance its efficiency. Due to 37

47 the random nature of the screening process, any acceleration allows a pharmaceutical company to increase the number of compounds tested and therefore increase the likelihood of scoring a hit or finding a compound with higher potency and specificity and thus to generate a lead. Hit Optimisation and Lead Profiling As described above, the identification of hits from the primary screening is followed by the synthesis of directed libraries, their screening, and the determination of the potency and selectivity of the optimised hits against the target and related members of the target family (secondary screening). The hits are ranked and the top ten best are designated leads. Before further chemistry is applied to those compounds, the leads are profiled for their biological and biophysical behaviour. Simplified molecular and cellular model systems that mimic the whole animal physiology are applied to gain information about the lead s solubility in blood plasma, its cell penetration capabilities or its liver toxicity. This phase of preclinical drug development is often called Early ADME/Tox which stands for the following properties of the lead compound: Absorption by the intestinal systems, Distribution within the body, Metabolism by the liver and other systems, Excretion out of the body and Toxicity. The molecular and cellular surrogate systems try to bridge the gap between a need for high-throughput and true physiological information about a lead compound; the latter is usually only gained by whole animal experiments. The information is needed to decide which lead is to be taken further into costly animal trials and medicinal chemistry programmes and finally into clinical trials. Clinical Trials Clinical trials are very time consuming and expensive. They are subject to very strict regulatory requirements in all major pharmaceutical markets. Phase I usually includes a study on safety, pharmacological effects and pharmacokinetics on healthy volunteers as well as a dosage study to identify the maximum tolerated dose for humans. In Phase II the drug is tested on a large sample of patients to study efficacy and in order to obtain further evidence on safety, dose ranging and adverse effects. In Phase III a large and heterogeneous patient population is treated with a drug and observed for a longer period of time. In addition to the Phase II tests on the characteristics of substances, comparisons are made with treatment methods already available. Only after this stage has been completed can regulatory approval be sought for the new drug. This process is extremely costly and it may take many years until final approval is obtained and the marketing of the drug can commence. In many cases, compounds and validated targets which showed promising effects on targets in vitro proved to be ineffective in vivo or had other properties unsuitable to a drug, such as high toxicity or low bio-availability. Due to the high cost associated with clinical trials, pharmaceutical companies strive to keep the attrition rate in clinical trials as low as possible. Accordingly, there is strong demand for screening technologies which will identify certain properties of a compound, such as its chemical behaviour inside the body. These lead profiling ADME/Tox tests allow pharmaceutical companies to restrict clinical trials to those substances which not only show an effect on the target, but in addition have properties which make them likely candidates for therapeutic substances. Pharmacogenetic studies will be included in clinical trials in the near future. This will enable the pharmaceutical effect of a compound with respect to the genetic background of patients, to be determined since some drugs have no effect on certain genotypes. Shortcomings in the Drug Discovery Process Drug discovery continues to be a costly and time consuming process, in which a large part of the cost incurred is attributable to research on substances which eventually fail to reach the marketing phase. Often products fail in the later stages of the development process because they show inadequate therapeutic efficacy or have unexpected side effects. The Company believes the most significant shortcomings are as follows: Insufficient Speed of Drug Discovery A combination of factors is increasing the pressure on pharmaceutical companies to accelerate the rate at which they bring new drugs onto the market. It is estimated that in order to be profitable each major pharmaceutical company needs to launch at least two new drugs per year. As the drug discovery process is largely based on iterative processes, such as the screening of large compound libraries against certain targets, the probability of identifying a promising compound for pharmaceutical development can only be increased if these processes themselves are accelerated and made more efficient. A key to increased speed of the drug discovery process is miniaturisation. Most present-day 38

48 drug discovery facilities rely on colourimetric, radioisotopic or fluorescence assays and have to work with plates each carrying 96 or 384 small indents (wells) into which 50 to 200 microlitre amounts of reagents can be pipetted. State-of-the-art screening systems are able to derive reliable data at an acceptable signal-to-noise ratio from sample volumes of 10 to 100 microlitres. While the actual time required for the detection device to complete its measurements is usually not a limiting factor in screening, the time consumed by the liquid handling system filling the microtiter plates, the robotics moving the plates from refrigerators and incubators into the detection area, the positioning of the detection device and the removal of the microtiter plate from the analyser are critical. Greater efficiency can only be achieved if the number of wells on each plate is substantially increased, so that instead of 96 compounds a much larger number of compounds per plate is handled by the system. Smaller assay volumes also eliminate the need to mix the solution in the well, making the screening process simpler and faster. Even though the advantages of miniaturisation are obvious, most screening systems are unable to operate on smaller assay volumes, since their detection technology is inadequate to cope with the lower signal derived from smaller quantities of reagents. In addition, they may lack the liquid handling technology required in order to cope with the physical problems of miniaturisation, such as nanolitre handling, evaporation and the higher surface to volume ratios. Too Many Failures too Late in the Process The costs of drug discovery and development are spread unevenly over the various stages of the process. While the costs of primary screening per compound will usually be limited to up to USD 10, the later stages of drug development, in particular the clinical trials and the regulatory approval process may consume several hundred million USD per compound. It is therefore of utmost importance to the pharmaceutical industry to reduce the attrition rate by weeding out compounds which appear promising, but fail in later stages, as early as possible. According to estimates by a pharmaceutical company, of 100 compounds entering development, only 10 achieve registration, and of those 10, only 3 achieve a fair yield on investment. At the same time, the number of compounds which fail to be identified in screens although they have promising characteristics has to be kept to a minimum. One key to reduced attrition is the increase of data output in the early stages of drug discovery in order to learn as much as possible about the characteristics of a compound. The problem with conventional detection technology used in drug discovery is that it is typically only able to read out one parameter at a time. In order to devise assays capable of reading out several molecular parameters, researchers have to either switch between single mode analysers and reconfigure the screening line or they have to set up screening systems which combine several single mode detection systems in sequence. Most assay strategies therefore make use of only a single property of a compound. However, the broad applicability of a screening system requires the inclusion of a variety of detection modes using a single detection platform. The Company believes that there is substantial demand for screening systems able to collect multiple data points per measurement. This not only provides an internal control, but also contributes to screening efficiency by enabling rapid multi-parameter evaluation of compound-target interactions and by these means eliminating false positives/negatives early in the drug discovery process which would otherwise create considerable costs. Limitations in the Miniaturisation of Assays With the advent of High-Throughput Screening the consumption of reagents, targets and compounds in mass screening has become a major cost factor for the pharmaceutical industry, since both chemicals and biological substances can account for most of the costs of a screen. Very often, a screen comprising more than 100,000 compounds requires the use of fermenters to provide ample recombinant protein for the screen, which in turn lead to high operating costs. In cell based assays the unavailability of large amounts of primary cells for screening may also be a limiting factor for conventional non-miniaturised screening technology. Primary cells, however, are a preferred reagent due to the more accurate physiological response they deliver in comparison to engineered cell lines. A key to lower cost screening therefore is the use of smaller assay volumes. Hazardous and Costly Reagents Certain assays use radioisotopes. Problems associated with the use of radioisotopes include safety issues, regulations, paperwork, disposal costs and the need to employ specialised personnel. In addition, radiometric detection technologies provide less stability, lower spatial resolution, less scope for signal modulation, a feature which permits homogeneous assays to be designed, and are more expensive to run than fluorescence based detection technologies. 39

49 EVOTEC s Approach Before developing its own technology platform, the Company carefully analysed the current drug discovery process in order to identify core factors which needed to be optimised to enhance the efficiency and accuracy of drug development. At EVOTEC an inter-disciplinary team of scientists from the fields of biochemistry, biology, chemistry, physics, fine engineering and computer science has developed solutions which: increase the quality and amount of data generated per compound tested in screening increase the sensitivity of the detection devices reduce the complexity of assay handling reduce the assay volumes in order to increase throughput reduce the cost of reagents and the handling and disposal costs thereof EVOTEC has designed and developed a technology that generates more data per well screened than other screening systems coupled with a detection unit so sensitive that significantly reduced assay volumes are irrelevant to signal output. The EVOTEC technologies comprise single molecule detection, signal processing, single-cell and single-bead handling as well as screening, robotics, nano liquid handling, nano storage of compounds, an integrated high performance separation device (HPLC) coupled to a nano fractionation and an advanced data handling system. While EVOTEC envisages applications for its technologies in the drug discovery process both up and downstream of the initial primary screening of large libraries, it has as a first step integrated these technologies to form EVOscreen, a powerful drug discovery platform designed to provide solutions for the evolving ultra-high-throughput Primary-Screening requirements of drug discovery units. The advantages of the systems developed by EVOTEC are set out in the following table: Characteristic Significance Simultaneous read-out of currently up to three different read out parameters based on single molecule detection. Uncoupling of detection volume from assay volume. Single molecule detection sensitivity. Applicability to most targets and target families. Enhanced assay development. Cell based and biochemical assays. Nanolitre liquid handling and compound storage. Fully automated access to compound libraries. Integrated high performance separation device (HPLC). Advanced data handling system. Throughput of up to 100,000 compounds per day. Exclusion of false positive hits. Detection sensitivity unaffected by miniaturisation of assay volumes. Labelled reagent needs only nanomolar concentrations; quality of data. Broad application of the technology; single detection platform. Savings in time and cost of assay development. Broad application of the technology. Reliable liquid handling with on-line quality control is needed for miniaturisation and logistics. Rapid integration of compound storage systems, no need for manual intervention. Technology applicable to natural compound screening. Data acquisition and interpretation fully transparent and reproducible. State of the art ultra-high-throughput. A prototype of the EVOscreen system (EVOScreen Mark I) was completed in Towards the end of 1999 the Company expects to complete an upgraded version of the EVOscreen system (EVOscreen Mark II) which will be ready for delivery to its collaboration partners NOVARTIS, SMITHKLINE BEECHAM and PFIZER. The Company intends to apply its technologies to other bottlenecks in the drug development process such as target identification and validation (functional 40

50 genomics, differential messenger RNA profiling), orphan target family screening, profiling and early ADME/Tox applications. In these areas the increased data output and quality of data, flexibility, speed and sensitivity of EVOTEC s technologies can also be expected to substantially enhance the effectiveness of drug discovery. Corporate Strategy The Company aims to become a leading provider of technologies, services, lead/target products and instrumental systems which enhance the speed and efficiency of the drug discovery process. It also intends to expand the application of its technologies and services to the agricultural and food industries. EVOTEC has completed the first phase of its corporate strategy by the completion of EVOscreen as its drug discovery platform and the technology associated with this product. While continuing to develop drug discovery technologies, the Company has commenced development of a drug discovery services business, developing and out-licensing its own drug discovery products as well as out-licensing spin-off technologies. To implement this strategy the Company intends to: continue to develop and integrate advanced technologies for drug discovery. The Company has developed the EVOscreen system under collaboration and technology transfer agreements with NOVARTIS and SMITHKLINE BEECHAM. By entering into new collaborative agreements with pharmaceutical and biotechnology companies the Company intends to generate revenues and to refine further the technological base of this screening system. In June of this year the Company concluded a technology acquisition agreement with PFIZER concerning further developments of the EVOscreen technology. The Company sees advantages in such collaborations because they provide access to user application know-how, which helps EVOTEC to focus on the real needs of the life science industry and covers part of the development costs of EVOTEC. The Company will pursue this business strategy by forming new semi-exclusive technology development consortia addressing other steps in the drug discovery process. For example, target validation and hit profiling are bottlenecks within the preclinical drug discovery pipeline comparable to screening. EVOTEC is working on technical solutions which increase the efficiency and accuracy of these processes and expects additional partners to co-fund technology development activities. The results of such a development will be shared with the funding partners as has been the case with EVOscreen. offer assay development, screening and other early drug and target identification characterisation services to the pharmaceutical and biotechnology industry. EVOTEC s technology platform can be applied in various phases of the drug discovery process. The target screening services business offers state of the art ultra-high Throughout identification of hits, coupled with high quality bit information and advanced data handling systems. The Company expects increasing demand for target characterisation, assay development for target families and compound profiling and early ADME/Tox studies. The Company believes that the major part of its revenues in coming years will be derived from fees in connection with its activities as a service provider. A second line of income is expected from milestone payments on advanced hits and leads as well as royalties on drugs on the market. run in-house preclinical drug discovery programmes and develop innovative lead/target products which can be licenced or sold to third parties. The Company expects to be able to license compounds and validated targets for clinical development to pharmaceutical companies for up-front payments, milestones and royalties. EVOTEC believes that drug discovery will ultimately become its core business. Existing alliances in this area include an agreement with GPC. EVOTEC s focus will be on neurodegenerative diseases (e.g. Alzheimer s Disease, dementia) and the field of anti-infective agents, where due to the Company s academic collaborations a significant number of proprietary targets are already available. In order to obtain access to further targets and high quality compound libraries EVOTEC will also seek to enter into collaborations with pharmaceutical and biotechnology companies which contribute targets and/or compounds for a share in licence fees and royalties. The Company does not intend to embark upon the clinical development of drugs. set up separately managed and funded companies in order to develop applications of EVOTEC s proprietary technologies outside drug discovery. As a first step the Company has set up EVOTEC Analytical Systems GmbH (EAS) in order to exploit the possibilities of using 41

51 EVOTEC proprietary technology in diagnostic instruments and applications. Collaboration partners of EAS include QIAGEN. stay at the forefront of scientific development. The Company has assembled a highly qualified multi-disciplinary team of experts, including, among others, biologists, chemists, physicists, information technology and robotics experts. The Company intends to expand its efforts in R&D through the addition of more scientific and technical staff dedicated to the further development of its technologies. The Company encourages its scientists to be active members of the scientific community and to intensify their contacts with academic research institutions worldwide. The Company lays special emphasis on creating an atmosphere which attracts the most highly qualified scientists in the fields of molecular biology, chemistry, biochemistry and biophysics. In order to retain key personnel and give additional incentives to its employees the Company has introduced a share option programme which will give employees the possibility to receive options and to participate thereby in the economic success of the Company. Technology Platform EVOTEC has developed, assembled and improved a number of technologies which, in different combinations, address the series of shortcomings in the preclinical drug discovery process. The selection of the respective technologies was influenced by the need to increase the accuracy and efficiency of various steps in the drug development process, for example, miniaturisation, resulting in increased turnaround numbers and improved data quality. FCS and FCS + plus Detection Technology In screening, the interaction between two biomolecules (e.g. ligand receptor, substrate enzyme, protein protein, protein DNA) is observed in the presence of a test compound. Observation is only possible, however, when a signal is monitored along with the interaction. The obstacle researchers have to overcome is that a physiological interaction between two biomolecules does not of itself generate a signal that can be monitored by any of today s High-Throughput Screening instrumentation. Therefore, labels are introduced which generate a signal strong enough for monitoring of the interaction. The label can be detected either directly or indirectly or monitored indirectly by measuring a product of a reaction taking place between the biomolecules. Common labels introduce signals based on radioactivity, fluorescence, luminescence or colour absorption. Common to each labelling procedure is the introduction of the label to the test system. This must be done in such a way that the physiological interaction of the two biomolecules is affected as little as possible, in order to ensure that modifications of the interaction are caused by the test compound and not by the label. Thus, labelling during assay development has become an art in itself. The labels differ in the richness of information they provide once successfully introduced into the system. Fluorescence is by far the most sensitive label and is capable of monitoring even subtle modifications of the interaction. In addition, a fluorescent label can show changes in its molecular environment in different ways. Due to this maximum in information density, fluorescence was chosen as the basis for EVOTEC s detection technology. 42

52 The highly confocal optics reduces the detection volume to as little as one femtoliter. By these means, miniaturisation of the sample volumes can be accomplished without any loss of signal quality. At the core of the EVOTEC approach is its proprietary detection technology, Fluorescence Correlation Spectroscopy (FCS). Certain molecules used as fluorescent markers have the ability to be excited to higher energy levels by a strong light source, for example a laser. When these molecules return to lower energy levels they emit light, which is referred to as fluorescence. EVOTEC has refined laser spectroscopy by combining it with confocal microscopic optical systems. Using such an optical system the laser beam can be highly focused, so that only the molecules in a volume of 1 femtolitre (a millionth of a billionth of a litre) which corresponds roughly to the size of a bacterial cell are hit by the light emitted by the laser. Even if very small assay volumes of 1 microlitre (a millionth of a litre) are screened, the assay volume is still very much larger than the confocal focus of the laser beam which only focuses on a minute portion of the reagent. Molecules in the sample are able to diffuse randomly through the illuminated confocal focus of the laser. During the course of this journey they give rise to bursts of fluorescent light which are individually registered by a highly sensitive single-photon detection device. A computer that correlates these bursts of fluorescent light measured by the detection device with the emitting molecules in the sample is able to quantify differences in the translational diffusion of those molecules, and so distinguish one molecule from another. 43

53 Cell-based FCS+plus assay: The laser is focused on a portion of the cellular membrane containing different transmembrane receptor proteins (left). Ligand molecules that have been labeled with a fluorescent dye are added, migrating freely outside the membrane. Certain ligands that may present a potential drug are captured by and bound to a specific receptor. The fluorescent light emitted by such an immobilised ligand within the laser focus (right) is detected and evaluated by FCS+plus. In a typical assay set-up using FCS a target molecule is first exposed to a fluorescently labeled reagent which has the known ability to bind to the target molecule. The resulting fluorescence is then measured and the processed data considered as the benchmark. In a further step, the target is exposed to both the fluorescently labelled reagent and an individual compound from a compound library. If the compound used in the screen is able to bind to the target, it will replace the fluorescent reagent at the binding site of some of the target molecules. Thus, the ratio between bound and unbound labeled markers is shifted. By measuring the difference in light emission between the benchmark and the respective well containing a certain compound a scientist is able to identify those compounds which are able to bind to the target. FCS in its fundamental form is based on the translational diffusion of molecules and is therefore limited to detecting significant changes in molecular weight upon chemical interaction. To broaden the range of application of FCS EVOTEC has developed additional analytical methods which enable interactions between molecules to be detected and evaluated on the basis of a wide range of other properties independent of changes in molecular weight. These new technologies, referred to as FCS + plus, evaluate fluorescence signals from single molecules as explained in the following table: 44

54 Method Significance Rotational diffusion. Changes in fluorescence lifetime. Fluorescent brightness. Spectral shift. Fluorescence energy transfer. Triplet transition probabilities. Multiplex detection. Multi-dimensional detection of the parameters mentioned above. The speed of rotation of a fluorescent tag changes upon binding of the second molecule. The lifetime of the fluorescent signal is dependent on the molecular environment of the fluorescent tag. The molecular fluorescent brightness of the tagged biomolecule changes upon binding to the second biomolecule. Excitation and/or emission wavelength of the fluorescent tag can change upon binding. Energy can be transferred from one fluorescent tag to another only if biomolecules are binding to each other. The likelihood of triplet formation can change upon binding. Combination of the above, including translational diffusion/fcs. Higher quality and reliability of data; more detailed information. The major advantages of FCS and FCS + plus technologies as compared to conventional selection technologies can be summarised as follows: FCS measures the chemical activity in a time resolved manner within its 1 femtolitre focus irrespective of the assay volume. FCS therefore obtains the same signal irrespective of the assay volume. By contrast, ordinary fluorescence spectroscopy technologies measure the fluorescence in the whole or a defined part of a well and therefore obtain less signal in lower assay volumes. The dissociation of assay volume from signal strength is one of the major achievements of EVOTEC with FCS and FCS + plus. As a consequence, screens can be run with smaller quantities of materials, which means that the scale of target protein preparation can be kept down, intervals for re-synthesising library compounds are extended and expenditure on assay reagents reduced. FCS measures relative differences in fluorescence, i.e. the differences in translational diffusion of labeled reagents in their bound or unbound state. Whereas other methodologies often suffer from disturbing influences including inner filter effects, sample autofluorescence, surface effects and from drastically reduced signal to noise ratios when assay volumes are reduced, the single molecule based FCS/FCS + plus technology is able to differentiate the signal from background. FCS relies only on the natural diffusion of molecules in the well. Stirring and other techniques to achieve an even distribution of molecules in the well are not needed for volumes of less than 1 microlitre. Due to its superior detection sensitivity, FCS can use standard fluorescent markers which are comparatively inexpensive and present no disposal problem. The Company has developed considerable know-how in marker technology. FCS measurement is fast, taking only about one second per well. It is therefore ideally suited for high-throughput applications. Common read-out technologies like colourimetry, fluorescence intensity measurements or radioisotopic scintillation proximity determinations can measure just one molecular property at a time. FCS + plus allows all the above mentioned parameters to be detected using the same optical and electronic configuration yielding biophysical, kinetic, qualitative and quantitative realtime data on compound activity. This also enables cross-checking to sift out any incorrect responses. Pursuing false positives is a major drain on time and resources in drug discovery. FCS + plus screening technology can effectively conduct assays with living cells. Such cell-based assays provide approximations to the conditions in a living organism and therefore provide 45

55 additional biologically relevant information. Most assay strategies for use in living cells rely on genetically manipulated, otherwise known as recombinant, cells. The reason for this is that primary cells, i.e. those taken without modifications from humans or animals, cannot be provided in sufficient quantities to run conventional screens with large numbers of compounds. Since EVOTEC s assays are performed in 1 microlitre sample volumes, only a small number of cells 100 to 1000 per well are needed for high quality screening runs. Hence, EVOTEC is able to use primary human cells rather than recombinant cell lines which more closely mimic physiological systems and interrogate the ability of test compounds to reach intracellular sites of action. The sensitivity of these methods also enables the measurement of secretory products from primary cells. With differently labelled antibodies multiple binding to distinct epitopes can be detected and quantified using FCS + plus. Microfluidics and Robotics The ability of EVOTEC s FCS + plus technology to efficiently screen assay volumes in the 1 microlitre range can only be usefully applied if combined in ultra-high-throughput Screening systems with microfluidics and robotics technology working with the same level of precision. High-Throughput systems are composed of a series of devices physically linked by a transport mechanism for sample carriers. The reliability of such devices is dependent upon the functional quality of the device, the ease of physical interaction between the device and the transport mechanism, and the software used to control the device within the system. EVOTEC, together with its partners in the areas at fluidics and robotics, GeSim and Sysmelec, have devised a system meeting all the requirements of ultra-high- Throughput Screening. The first limiting factor for miniaturisation of screening systems is the conventional micro-titer plates which allow assay volumes of no less than 50 to 100 microlitres and a maximum number of 96 wells per plate. EVOTEC uses a Nanocarrier of the same dimensions as the conventional 96 well micro-titer plates, but holding 2,080 sample wells. This provides a 1536 format well (which is the well-known standard format) plus 4 rows for additional controls and a safety moat to prevent edge-effects due to evaporation. A comparison of the reduction in space achieved by using miniaturised sample carriers samples may be carried either by 23 microtiter plates seen in the picture or a single 2080 well nanocarrier seen in the lower right. EVOTEC previously used expensive, re-usable high-precision glass trays, but in August 1999 introduced a newly developed, inexpensive, proprietary, disposable Nanocarrier made from plastic with a cover slip glass bottom plate. EVOTEC has designed a special unit (Micro to Nano/M2N) which is able to reformat samples stored in the conventional micro-titer plates to the high density Nanocarriers used 46

56 for ultra-high-throughput Screening. Also included is an automatic storage and retrieval system providing a compound repository as well as transport mechanisms for the millions of compounds to be used in the screening runs. By using the same Nanocarriers in screening runs as well as for permanent storage of the compounds and extracts being tested, resource consuming reformatting steps are eliminated. EVOTEC has developed a transport mechanism for screening systems, a so-called plate handler, which is a simple and compact device that reduces the complexity in plate handling. A combination of an active positioning process of the plates and high local intelligence of the devices enables a high flexibility of the whole system. Additionally, the dynamic scheduling programme is versatile in being able to handle a variety of assay formats. EVOTEC s pipetting and dispensing systems enable components to be quickly and reproducibly added in volumes in the nanolitre range to thousands of test wells per plate. Mechanical stirring or mixing is no longer necessary because full mixing happens within seconds by diffusion of the components across the small volume of the sample. EVOTEC s liquid handling systems enable the handling of practically all kinds of liquids irrespective of their viscosity, surface tension or concentration. EVOTEC has also developed technology to cope with evaporation. One specific feature of EVOTEC s nano liquid handling system is single-drop monitoring and on-line quality assurance in order to guarantee continuous performance. The monitoring system tracks every variable including the size of the droplet, to the incubation time and compound concentration and factors it into the results, so that full quantitative and qualitative control is maintained throughout the process. Real time quality assurance systems automatically detect the emergence of bubbles in the system and eliminate them so that they do not interfere with the screening process. Accurate and precise liquid handling decreases significantly the variations that could otherwise occur between plates and between different wells on one plate. In addition, the ability to transfer accurately small volumes of test compounds (down to volumes of 1 nanolitre) decreases the amount of pipetting because compound dilution steps are minimised or eliminated. A number of assays are sensitive to organic solvents, e.g. dimethylsulfoxide (DMSO). In order to keep these solvents at minimum concentrations, the capability to accurately transfer nanolitre volumes is essential for those assays. Scanner/Picker Technology It has become common in combinatorial chemistry to synthesise compounds on the surface of beads. EVOTEC has developed a unique technology specifically designed to address the need for onbead screening of combinatorial libraries. Using the same detection technology as in liquid assays EVOTEC is able to conduct screens on beads. With most conventional screening technologies the compounds have to be cleaved off the bead surface in order for them to be separately screened. EVOTEC s Bead-Scanner/Picker (PICKOscreen) allows individual beads to be retrieved for further analysis. 100,000 beads can be analysed in a few hours. Positively identified beads can be retrieved automatically and analysed by mass spectroscopy to identify the respective chemical structure. The same technology can be used to select single bacterial and mammalian cells which can then be retrieved and amplified. The system for high-throughput on-bead screening for combinatorial chemistry compound analysis was delivered to NOVARTIS in December The instrumental set-up of the system is based on FCS + plus technology. Beads are spread out on the surface of a matrix and scanned multi-dimensionally by the laser optics. The laser optics measure varying FCS fluoresence parameters. Pattern-recognition software assigns the images to individual beads and enables their exact position to be defined. After completion of the scan, the picker is automatically positioned at the corresponding locations for the subsequent selection of the identified beads. Information Technology EVOTEC s technology includes integrated control of the information flow from library design to the computation of activities for lead finding and decision support. Processing signals from photon counters is part of EVOTEC s core technology which includes the development of specialised hardware. EVOTEC s quality concepts ensure that process reliability follows the rapid development of EVOTEC s screening technology. The screening process is monitored online and system parameters flow through a feedback and improvement cycle. 47

57 Superior data analysis is an essential step in ultra-high-throughput Screening. Depending on the assay, EVOTEC applies various technologies for data analysis. Static or dynamic thresholds are defined before screening or once screening results for a complete library or single plates have been generated. Ultra-High-Throughput Screening is a central step in drug discovery. While screening results are the end product of a sophisticated process, they are also the basis for further analysis. EVOTEC has developed software that automatically detects hidden compound-activity patterns and correlations between chemicals or targets. Quantitative structure activity relations are exploited in order to predict activities of compounds that might not even exist yet. The enhanced information content provides a thorough foundation for EVOTEC s decisions and the decisions of its clients regarding selection of compounds, design of focused libraries, and synthesis of new compounds. HPLC: Micro to nano interface (M2N): FCS+plus detection unit: Corporate database: nano separation of natural extracts. the reforming link between traditional a variety of read-out parameters accessible efficient management microplates and nanocarriers. through a single detection unit. of screening data. Microfluides: precise liquid handling for high-density assay formats. Use of Technology EVOTEC integrates its technologies into various systems designed to overcome the shortcomings in the drug discovery process as outlined above. The following systems are the basis for the products and services offered by EVOTEC: Ultra-High-Throughput Screening System EVOscreen EVOscreen consists of the following components: a high performance confocal fluorescence correlation spectroscopy (FCS + plus) detection unit usable in either a single channel or multi-channel mode a miniaturised, automated liquid handling system for nano to low microlitre volumes (including pipetting, dispensing and compound retrieval) Nanostore, a rapid, miniaturised multi-replica compound repository providing the link between traditional single-compound library formats and EVOscreen a micro-separation device (HPLC) coupled to the detection system. 48

58 A prototype of the EVOscreen system (Mark 1) is operating in fully automated 24 hrs shifts at the Company s headquarters in Hamburg. The EVOscreen system is designed for fully automated operation with assays performed in a volume of 1 microlitre. This combination of automated operation and the high degree of miniaturisation enables the system to achieve economies of scale in High-Throughput Screening which will result in costs per well up to 50% lower than competing screening systems. The EVOscreen system incorporates industry standard database software offering the highest level of performance and security for screening data analysis. Individual compounds are tracked throughout the entire screening process and correlated with assay results to provide complete information on all compounds in a particular screen. The data output is designed to be compatible with existing laboratory information systems to allow ease of use for screening services customers. The full integration of high performance detection technology, precision sub-microlitre liquid handling, industrial automation robotics and all aspects of assay development in the EVOscreen system represents a unique level of process control in drug discovery. By integrating all aspects of the drug discovery process from assay development through high-throughput miniaturised screening the entire process can achieve an improved level of efficiency and cost effectiveness. In addition to hardware, the EVOscreen drug discovery system also encompasses the assay development expertise amassed in internal biological assay development programmes and those conducted on behalf of collaboration partners. This includes expertise in the adaptation of biological assays to miniaturised homogeneous assay formats for drug discovery applications, as well as extensive expertise in the chemical process of fluorescent labelling molecules of biological interest. The Company s proprietary detection technology, FCS + plus, also plays a role in the assay development process by allowing multiple detection modes to be employed in the design of assay strategies. While EVOscreen is particularly suited to ultra-high-throughput Screening, the Company has expanded the application of its system to cover both the earlier stages of the drug development process such as target identification and validation and is currently developing the technology for the later preclinical stages such as pharmacological and toxicological assays in secondary and tertiary screens. EVOTEC has achieved this by developing other proprietary technologies, such as single-bead and single-cell selection, and integrating them into the EVOscreen system. The result is a single platform which will eventually cover the entire preclinical drug development process from target identification to lead profiling. On-bead Screening PICKOscreen Based on its proprietary optical and electronic detection technology, EVOTEC has developed a unique device for specific applications in on-bead screening the PICKOscreen system. The PICKOscreen system will find its primary application in the analysis of chemical libraries generated by solid-phase synthesis methods. Versions of the system have also been designed to allow screening and 49