Evotec OAI AG, Second Quarter Report 2003

For further information please contact:

Anne Hennecke Investor Relations, Corporate Communications

+49.(0)40.560 81-286 +49.(0)40.560 81-333 Fax [email protected]

Evotec OAI AG Schnackenburgallee 114 D-22525 Hamburg www.evotecoai.com

Dear shareholders,

We are delighted to report sales growth of 5% in the second quarter, resulting in a sound growth rate of 5% for the first six months of 2003. At constant exchange rates, sales growth in the first half of the year was 16%. Given the continued tough market environment and exchange rate pressures from the strong Euro against the US-Dollar and Sterling, this is a very satisfactory result. We are also pleased to announce that EBITDA was positive for the first six months of 2003, and we are on track to be EBITDA positive for the full year.

Above average growth in Discovery Biology resulted from our newly established biology service contract with Novartis. Evotec Technologiesí performance under our three-year contract with Pfizer also contributed positively. Cost reductions in SG&A and the refocusing of R&D activities initiated last year led to a decline in our R&D spending of 34% and SG&A expenses of 13%. Solid revenue growth in concert with these cost savings led to a 33% improvement in operating loss and to positive EBITDA for the first six months. Our liquidity position stands at EUR 16.3 million due to an anticipated inventory build up during the second quarter. This short-term effect will be reversed by instrument deliveries in the second half of 2003.

We also made excellent progress with regard to our new Discovery Programs Division by closing a major partnership recently: We signed an agreement with Takeda with a contract value of up to EUR 20 million,

strongly endorsing our investment in target identification and validation in Alzheimerís Disease performed over the past four years and our strategy to become actively involved in selected fields of drug discovery alongside a partner.

Highlights

Continued track record in Discovery and Development Services

Our core business, Discovery and Development Services, continued to deliver excellent results for customers, outperforming most of our peers in the current challenging environment:

Our main focus in Discovery Biology was our hit-finding programs for Novartis. We successfully completed the first target screening, for the first time running an adherent cellular assay on EVOscreenÆ Mark III in miniaturised formats and ultra-high throughput, performing close to 100,000 tests per day. In our collaboration with Oxagen our scientists implemented a highly complex sensitive cellular assay, which has been screened on our new medium throughput screening platform. Further activities included several hit-finding and profiling projects for Elixir, Infinity Pharmaceuticals and KeyNeurotek/Institute of Medical Technology Magdeburg as well as our assay development project with Pfizer.

In Discovery Chemistry, we successfully continued our multi-year programmes with companies like Merck, Amgen, Pharmacia, Roche and Solvay. New contracts have been signed with Axxima, Oxagen and Artesian. We have continued our lead optimisation collaboration with Curis and have been rewarded with a milestone payment for delivery of a drug candidate to them. Scientists from British Biotech were successfully integrated into our medicinal chemistry team after our acquisition of British Biotechís research unit.

Key customers in Development Chemistry included GlaxoSmithKline, AstraZeneca, Elan, Serono, Celgene and UCB. Several have filed substantial new orders for delivery in the second half of the year across all disciplines, ranging from custom preparations through process research and development (PRD) to pilot plant production. Capacity utilisation in our pilot plant is better than anticipated, partially driven through PRD work carried out during Q2 2003. Following a voluntary inspection by the UKbased MHRA (Medicines and Healthcare Products Regulatory Agency) we have received a Certificate of GMP Compliance for our plant in June.

New contracts in medicinal chemistry signed with Axxima and Artesian

In addition to several new orders in discovery and development we signed two substantial partnerships in the second quarter, in which our partners capitalise on our leading medicinal chemistry expertise. In May we announced the fourth agreement under the innovative umbrella contract with venture capitalist Oxford Bioscience Partners (OBP). Artesian Therapeutics entered a three-year drug discovery service agreement with us to optimise small molecule therapeutics for the treatment of congestive heart failure, initially focussing on medicinal chemistry. In June, Axxima selected Evotec OAI as their partner to design and synthesise small molecule lead structures for one of their leading kinase projects.

Evotec Technologies will significantly contribute to 2003 growth

As expected, the new contract with Pfizer signed in October 2002 will contribute significantly to a strong 2003 performance by Evotec Technologies (ET). After achieving site acceptance testing of EVOscreenÆ Mark III at Pfizerís research site in Sandwich, UK, in Q1, an extension of this system for cellular screening has now been installed during Q2. In addition to the related revenue recognition, a milestone was achieved.

ET also signed an after-sales service and maintenance agreement with GSK for the Evotec technology platform installed at their sites. All EVOscreenÆ partners are now under contract, creating steady after sales service revenues for the company.

In May, ET announced the European launch of its CellProcessorTM instrument Elektra for cell cloning at the MipTec Conference 2003 in Basel, Switzerland. A distribution agreement with Quantum Design for Cytoman, a semi-automated core module of Elektra, has been signed for Japan and contributed to our order book in Q2.

Important events after the end of the second quarter

Equity participation of Pfizer in Evotec Technologies became effective in July

Evotec signed a significant discovery contract with Takeda in Alzheimerís Disease

After a successful three-year collaboration, Pfizer entered into a new threeyear agreement with Evotec Technologies (ET) in October 2002. As part of this transaction, Pfizer committed to make an equity investment in ET. This investment became effective 22 July 2003, with Pfizer becoming a 10% shareholder in the company.

On 1 August 2003, Evotec OAI, Evotec Neurosciences (ENS) and Takeda announced a four-year collaboration in the area of Alzheimerís disease (AD). Together the companies aim to identify and validate novel targets relating to different aspects of the causes and progression of AD, with the goal of developing innovative therapeutics.

ENS will receive payments from Takeda of up to EUR 20 million, covering access fees to ENSí target database, research funding and milestone payments relating to the selection of targets for further drug discovery. Substantial milestones would also be payable on the successful clinical development of compounds acting on selected targets.

This agreement is an important validation of Evotec OAIís strategy adopted in 1999 of focussing increasingly on drug discovery and selectively investing in high-value indication-specific research programmes together with leading academic institutions in order to cover a large part of the discovery value chain.

Bernard Questier will join Evotec OAI as new Chief Business Officer

On 6 August we announced the appointment of Bernard Questier as Chief Business Officer. Bernard Questier, 49, will join Evotec OAI with effect from 6 October 2003, leading the Companyís business development functions as a member of the Management Board. Mr. Questier brings more than 20 yearsí of international experience in various management positions. He is joining Evotec OAI following a successful career in Ventana Medical Systems, where he was responsible for most of the companyís business outside the United States.

Financial Report

Evotec OAI achieved a sound growth of 5% in the first six months of 2003. Revenues amounted to EUR 34.8 million (2002: EUR 33.2 million). At constant exchange rates revenue growth was 16%. Despite the adverse impact of currency, we maintain our Euro growth target of 10 to 15% for the full year 2003. Revenue

Third-party revenues in our Discovery and Development Services Division (DDS) amounted to EUR 28.0 million (2002 actual: EUR 28.8 million; 2003 adjusted for currency effects: EUR 31.7 million) in the first six months of 2003. Sales fell in the first quarter due to the one-off impact of revenues being deferred from Q4 2001 into Q1 2002, but in the second quarter revenues in the division grew by 5%, at constant exchange rates by 20%. This was supported by strong sales in Discovery Biology, partly because of a significant new hit-finding and profiling contract with Novartis. Sales performance of Development Chemistry services was slightly below expectation only due to deferred revenues from a delay in despatch of pilot plant material to a customer until 1 July.

As anticipated, third-party revenues in our Tools and Technologies Segment ìEvotec Technologiesî rose strongly, up by 58% to EUR 6.9 million (2002: EUR 4.4 million). This growth over the first half of 2002 is mainly attributable to the successful installation of the first EVOscreenÆ Mark III system at Pfizer in the first quarter and the extension of the system for cellular screening in the second quarter 2003.

In Euro currency terms, Evotec OAI recorded 56% of total revenues in Europe, 40% in the United States, and 4% in Japan and Rest of World.

For two reasons R&D expenses fell significantly compared to the previous year, down 34% to EUR 8.0 million (2002: EUR 12.1 million). On the one hand, it is a consequence of the restructuring programme announced in October last year. We started to reduce R&D significantly in technology development without impairing our core capabilities. On the other hand, income from FTE-based technology R&D services performed for Pfizer were netted against actual R&D cost as their equity participation in Evotec Technologies makes them a ìrelated partyî under US GAAP (FAS 68). Research and development and other cost

Cost of revenues amounted to EUR 20.7 million (2002: EUR 18.5 million). Gross margins improved to 40.5% compared to Q1 2003 (38.3%) due to a favourable sales mix in our Services Division. Compared to the same period last year (gross margin 2002: 44.3%) it was impacted by adverse movements in the US-Dollar, which accounts for a deterioration of gross margin of approximately EUR 1.4 million. Adjusted for these exchange rate

movements, gross margins were maintained at last yearís levels (44.4% vs. 44.3%).

SG&A costs for the first six months totalled EUR 9.4 million (2002: EUR 10.8 million), down 13%, mainly as a result of planned cost reduction initiatives.

The reduction in R&D and SG&A expenses led to a significant improvement in the Companyís operating loss. For the first six months of 2003 it fell by 33% to EUR (10.3) million (2002: EUR (15.3) million). Excluding amortisation charges, operating losses almost halved (-47%) to EUR (4.9) million (2002: EUR (9.2) million). Result

Net loss improved by 40% to EUR (8.2) million (2002: EUR (13.7) million). In addition to the improvement in the operating result, an R&D tax credit under the new tax regime in the UK contributed positively to net result. Net income tax benefits totalled EUR 1.7 million. Deferred tax benefits in the UK (EUR 0.3 million) and current taxes worldwide (EUR (0.1) million) added to deferred tax benefits from the amortisation of merger-related nongoodwill intangible assets (EUR 1.5 million).

Net income per share amounted to EUR (0.23) (2002: EUR (0.39)).

Earnings before interest and taxes, depreciation and amortisation (EBITDA) was positive. It improved from EUR (3.1) million to EUR 0.6 million.

Investments in fixed assets amounted to EUR 5.3 million. They included the purchase of chemical development and laboratory/analytical equipment, partially transferred from British Biotech to Evotec OAI, and investments for the fitting out of our new Discovery Chemistry laboratory building in Abingdon, UK. The new building will be completed early in 2004. Capital expenditure
Cash flow from operating activities amounted to EUR (2.2) million, a significant improvement over 2002 (EUR (4.8) million). This includes a net increase in working capital of EUR 3.0 million. The strong build up of inventories (EUR 3.9 million) is only a short-term effect in our instrumentation business, which will be reversed by sizeable planned instrument sales to Pfizer and additional customers in the second half of the year. Net cash flow from financing activities amount to EUR 3.1 million (2002: EUR (0.1) million). We have drawn down loan financing to match the capital expenditure for the fit out of the new laboratory building in Abingdon. Cash, cash equivalents and marketable securities as of 30 June 2003 amounted to EUR 16.3 million. Cash consumption in Q2 therefore was driven by investments and the build-up of instrument inventory for Pfizer. Cash flow and cash equivalents

Evotec OAI employed 664 people at the end of June 2003. Growth from the first quarter of 2003 is mainly due to the transfer of 17 research scientists from British Biotech, who in response to growing market demand will further strengthen our capacity and expertise in medicinal chemistry and biology. Employees and management

As stated in our first quarter report, we issued 46,000 stock options to new employees at exercise prices of EUR 1.66, 1.93 and 2.03 in the first three months of the year. In the second quarter, stock options were neither granted nor exercised. As of June 30, 2003, the total number of options that are available for future exercise amounts to 2,112,361, or approximately 6% of currently issued shares. Stock option programme

Although todayís market environment and, in particular, considerable exchange rate movements have adversely impacted Evotec OAIís financial performance in the first half of 2003, it has been outstanding compared to most of our peers. Thanks to our broad and well balanced business portfolio and our strong market presence we have achieved a continued actual growth of 5% YTD, and 16% adjusted for currency effects. Our sales and order book as of July amounted to EUR 67 million for 2003, covering 86% of analystsí revenue expectations for the full year (consensus: EUR 78 million). We expect this to result in a strong third quarter. In addition to continued good growth in our Discovery and Development Services Division, significant instrument deliveries to Pfizer are scheduled for September. On this basis we maintain our guidance for 2003, despite the continued strong Euro and overall business environment in the industry. Based on current prospects, we are confident of achieving our revenue growth target of 10 to 15% for the year. By delivering on our cost containment programme, Evotec OAI has achieved positive EBITDA in the first half of the year and is on track for positive EBITDA for the full year 2003. Outlook

Shareholdings of the Boards of Evotec OAI AG

	Number of shares	Share options
Management Board
Joern Aldag	286,556	132,600
Dr Dirk H. Ehlers	0	60,000
Dr Ian M. Hunneyball	0	40,000
Dr Timm-H. Jessen	136,172	83,232
Supervisory Board
Prof Dr Heinz Riesenhuber	110,400	0
Peer Schatz	3,892	0
Dr Pol Bamelis	1,500	0
Dr Karsten Henco	1,306,356	26,732
Dr Edwin Moses	313,058	15,000
Michael Redmond	1,000	0

30 June 2003

Pursuant to ß15a of the German Securities Trading Act (Wertpapierhandelsgesetz), the above table lists separately for each member of our Management and Supervisory Board, the number of Company shares held, and rights for such shares granted to each board member as of 30 June 2003.

Segment reporting according to US GAAP Evotec OAI AG and Subsidiaries

Euro in thousands except share data	Discovery and	Discovery	Tools and	Consolidation
	Development Services	Programs1	Technologies
Revenue:
ñ Drug discovery products & development of technologies	9	-	7,234	(334)
ñ Drug discovery services	28,809	10	-	(891)
Total revenue	28,818	10	7,234	(1,225)
ñ Cost of revenues	17,526	6	3,652	(473)
Gross Profit	11,292	4	3,582	(752)
ñ Selling, general and administrative expenses	6,949	932	1,482	(12)
ñ Research and development expenses	3,787	2,570	2,453	(833)
ñ Other operating expenses	1,672	-	-	-
ñ Amortisation of goodwill amongst other things	5,244	34	507	(397)
Operating income (loss)	(6,360)	(3,532)	(860)	490

¹ In 2002 included in Discovery and Development Services

Condensed consolidated statements of operations according to US GAAP

Evotec OAI AG and Subsidiaries

Euro in thousands except share data
	01-06/2003	01-06/2002	∆ in %	04-06/2003	04-06/2002	∆ in %
Revenues:
ñ Drug discovery products & development of technologies	6,909	4,777	44.6	2,439	2,489	(2.0)
ñ Drug discovery services	27,928	28,424	(1.8)	14,578	13,768	5.9
Total revenues	34,837	33,201	4.9	17,017	16,257	4.7
ñ Cost of revenue	20,711	18,490	12.0	9,715	8,400	15.7
Gross profit	14,126	14,711	(4.0)	7,302	7,857	(7.1)
ñ Selling, general and administrative expenses	9,351	10,795	(13.4)	4,769	5,560	(14.2)
ñ Research and development expense	7,977	12,131	(34.2)	3,548	6,660	(46.7)
ñ Other operating expenses	1,672	996	67.9	823	996	(17.4)
ñ Amortisation of goodwill amongst other things	5,388	6,106	(11.8)	2,634	2,999	(12.2)
Operating income (loss)	(10,262)	(15,317)	(33.0)	(4,472)	(8,358)	(46.5)
ñ Interest income (expense)	3	325	(99.1)	(43)	177	(124.3)
ñ Income from investments and participations	-	-	-	-	-	-
ñ Income (expense) from associated companies	(51)	-	(100.0)	(15)	-	(100.0)
ñ Foreign currency exchange gain (loss), net	(3)	144	(102.1)	93	(2)
ñ Other income (expense)	374	502	(25.5)	64	102	(37.3)
Result before income taxes and minority interests	(9,939)	(14,346)	(30.7)	(4,373)	(8,081)	(45.9)
Income tax	1,749	591	195.9	1,135	45
Extraordinary income (expenses)	-	-	-	-	-	-
Result before minority interests	(8,190)	(13,755)	(40.5)	(3,238)	(8,036)	(59.7)
Minority interests	3	22	(86.4)	49	7	600.0
Net income / loss	(8,187)	(13,733)	(40.4)	(3,189)	(8,029)	(60.3)
Net loss per share (basic)	(0.23)	(0.39)		(0.09)	(0.23)
Net loss per share (diluted)2	-	-		-	-
Weighted average common share outstanding (basic)	35,510,130	35,508,427		35,510,130	35,508,427
Weighted average common share outstanding (diluted)	-	-		-	-
Depreciation of property, plant and equipment included in total operating expense	5,127	5,434	(5.7)	2,571	2,816	(8.7)

2 According to US GAAP the definition of net income per share does not allow to report diluted net income per share as long as the Company shows a net loss.

Condensed consolidated balance sheets according to US GAAP Evotec OAI AG and Subsidiaries

Euro in thousands	30/06/2003	31/12/2002	∆ in %
Assets
Current assets:
ñ Cash and cash equivalents	13,406	21,308	(37.1)
ñ Marketable securities, at fair value	2,887	-	100.0
ñ Trade accounts receivable	8,702	10,166	(14.4)
ñ Accounts receivable due from related parties	509	244	108.6
ñ Inventories, at cost	12,157	8,408	44.6
ñ Deferred tax assets	42	45	(6.7)
ñ Current tax receivables	2,392	2,665	(10.2)
ñ Prepaid expenses and other current assets	3,671	3,196	14.9
Total current assets	43,766	46,032	(4.9)
Long-term investments	640	560	14.3
Property, plant and equipment, net	59,251	61,951	(4.4)
Intangible assets, excluding goodwill, net	22,670	29,601	(23.4)
Notes receivable / loans	-	-	-
Goodwill, net	98,228	102,851	(4.5)
Deferred taxes	-	-	-
Other non-current assets	47	47	-
Total assets	224,602	241,042	(6.8)
Liabilities and stockholdersí equity
Current liabilities:
ñ Current portion of capital lease obligation	357	386	(7.5)
ñ Current maturities of long-term loans	1,569	1,067	47.1
ñ Trade accounts payable	5,026	4,565	10.1
ñ Accounts payable to related parties	119	8
ñ Advanced payments received	3,961	5,703	(30.6)
ñ Accrued expenses	5,845	5,552	5.3
ñ Deferred revenues	3,389	2,695	25.8
ñ Current tax payables	55	80	(31.3)
ñ Deferred taxes	-	-	-
ñ Other current liabilities	1,745	1,404	24.3
Total current liabilities	22,066	21,460	2.8
Long-term loans	8,870	6,820	30.1
Long-term capital lease obligations	1,595	1,113	43.3
Deferred taxes	12,895	15,544	(17.0)
Other non-current liabilities	53	53	-
Minority interests	641	645	(0.6)

Stockholdersë equity:
ñ Share capital	35,510	35,510	-
ñ Additional paid-in capital	536,911	536,908	-
ñ Treasury stock	-	-	-
ñ Retained earning/accumulated deficit	(357,192)	(349,006)	(2.4)
ñ Accumulated other comprehensive income/loss	(36,747)	(28,005)	(31.2)
Total liabilities and stockholdersë equity	224,602	241,042	(6.8)