Based upon the Company’s current financial plan it expects that its current cash and cash equivalents, short term and long term investments, together with its operating revenues will be sufficient to fund its planned activities at least until the end of 2010. The Company’s future cash requirements will depend on various factors, including its success in developing Evotec’s pipeline projects, its ability to partner the Company’s projects with collaborators, increasing sales of both existing and new services, expenses associated with sales growth as well as com- petition and the general economic situation. Expenditures on internal development programs or potential acquisitions of technologies or intellectual property rights are likely to reduce the Company’s short to mid-term profitability and cash reserves. The Company intends to reduce part of this financial ex- posure by entering into early stage collaboration agreements, to the degree possible and advisable while trying to maximize returns. Additionally, in the past, the Company has raised cash through capital increases. The Company does not intend to engage in projects or project phases unless appropriate funding is allocated or secured.
The Company conducts clinical trials which have a risk of failure. A clinical trial failure may have a negative impact on the Company’s financial position, results of operations and cash flows.
The Company has important collaborations with pharma- ceutical and biotechnology companies. Any termination of such collaborations or failure to achieve contracted milestones would likely have an adverse impact on the Company’s financial posi- tion, results of operations and cash flows.
With a high proportion of sales denominated in U.S. Dollar currency exposure creates a risk to our profitability, in partic- ular relative to the UK Sterling with the respect to the subsid- iaries in the United Kingdom. A weakening of the U.S. Dollar when accompanied by a relative strengthening of the UK Ster- ling against the Euro will reduce revenues and profitability and constitutes a significant risk to the Company’s financial situa- tion. The Company has entered into certain hedging activities to help mitigate the impact of the currency fluctuations on its results of operations before taxation.
Capital management
Evotec actively manages its funds to primarily ensure liquidity and principal preservation while seeking to maximise returns. Evotec’s cash and short-term investments are located at several different banks and financial investments are made in liquid, highly diversified investment instruments in low risk categories (products or financial institutions rated A or better (Standard & Poor’s ratings or equivalent)).
The following table shows the total assets, equity as well as equity ratio and net financial assets:
Years ended December 31,
T€ 2008 2007
Total assets 182,900 207,878
Equity 149,859 170,553
Equity ratio (in %) 81.9 82.0
No capital requirements are stipulated in Evotec’s statutes. The Company has obligations to issue shares out of the condi- tional capital relating to the exercise of stock options on the basis of miscellaneous stock option plans. Please refer with regard to the authorized capital and the conditional capital to Note 20. Credit risks
The Company has exposure to credit risks primarily with respect to its trade accounts receivables and its short-term and long- term investment which primarily invest in debt instruments. The Company performs ongoing credit evaluations of its customers’ financial condition and maintains an appropriate allowance for uncollectible accounts receivable based upon the expected collectibility of all accounts receivable. The Company’s accounts receivables are generally unsecured and are not backed by collateral from its customers. At December 31, 2008, one cus- tomer accounted for 44% of trade accounts receivables. In the prior year, one customer accounted for more than 20% of all trade accounts receivables. Concentrations of credit risk with respect to trade accounts receivables are limited by a number of geographically diverse customers and the Com- pany’s monitoring procedures.
The Company has further expanded its customer base. How- ever, the two largest customers of Evotec combined represent more than 53% of the group revenues in continuing operations in 2008 and more than 35% in 2007 in continuing operations. A termination of these business relations could have adverse impacts on the Company’s financial results.
At December 31, 2008, the Company had a guarantee out- standing of T€ 190 related to securing certain payment obliga-
tions. At December 31, 2007 no guarantees were outstanding. Market risks
The global economic downturn and the changing regulatory en- vironment are the dominant factors influencing the Company’s macro environment. 2008 has been widely considered as one of the largest economic downturns in the global economy. While Evotec does not intend to raise capital via the equity market in the near term it is uncertain as to when the financing cycle might improve.
The regulatory environment has become more challenging over the past several years. At the FDA managers were given the discretion to miss or delay some approval dates if needed. Additionally, it appears that the FDA is concluding that the risk of approval is only justified if a drug meets an unmet need or if it provides a well-defined benefit over existing therapies. For biotech companies, including Evotec, this means that they need to demonstrate that there is clear reason for compounds to exist
the chemical library business.
The market environment and competitive landscape for licensing and licensed projects or individual drug candidates, as well as the regulatory and reimbursement environment, in general or for individual treatments, might change while en- gaging in individual projects. The timing and commercial values of or financial proceeds from partnering individual projects could therefore deviate significantly from earlier projections.