INTERIM REPORT AND
QUARTERLY MANAGEMENT
REPORT BY
C O N T E N T S | G E N E R A L I N F O R M A T I O N
General information 2
Development of important key figures 3
Shareholders’ letter 4
Quarterly management report 5
Income statement 1 3
Balance sheet 1 4
Cash flow statement 1 6
Statement of changes in equity 1 8
Notes 1 9
1. Basis of valuation and significant accounting and valuation policies 1 9
2. Segment report 1 9
3. Earnings per share 2 1
4. Financing measures 2 1
5. Share property and directors’ dealings 2 1
6. Employees’ subscription rights 2 3
7. Events after the end of the reporting period 2 3
Financial calendar / Imprint 2 4
Table of contents
General information
Security code number 575381 ISIN DE0005753818 SE code VSCManagement Dr Ulrich Dauer, CEO Board Dr Gerhard Keilhauer, CDO
Dipl.-Kfm. Enno Spillner, CFO Dr Daniel Vitt, CSO
Principal Office 4SC AG, Am Klopferspitz 19a, 82152 Planegg-Martinsried, Germany IR Contact Bettina von Klitzing
E-Mail: [email protected] Phone 0049 (0) 89 700 763 - 0 www.4SC.com
2007-07-01 - 20060701 -2007-09-30 2006-09-30
resp. resp. 2007-01-01 - 20060101
-in KEUR 2007-09-30 2006-09-30 2007-09-30 2006-09-30
Net sales 325 737 960 1,769
Result from operating activities - 1,944 - 1,599 - 6,203 - 5,072
Period result - 1,948 - 1,600 - 6,189 - 5,062
Equity 21,457 8,232
Equity ratio 89.5% 77.8%
Balance sheet total 23,982 10,576
Cash Flows from operating and investing activities - 1,902 - 4,146 - 3,552 - 8,047
Cash Flows from financing activities 16,641 - 11 19,630 4,085
Net change in cash and cash equivalents 14,739 - 4,157 16,078 - 3,962
Cash and cash equivalents1 18,600 2,916
Number of employees (at end of period) 63 59
The 4SC share
Earnings per share (undiluted and diluted) [EUR] - 0.14 - 0.14 - 0.49 - 0.46
Shares in circulation (average, in thousands) 14,357 11,461 12,605 11,013
Percentage of freely tradeable shares2,3 96% 41%
3 resp. 9 month high (Xetra) [EUR] 3.40 4.34 3.85 5.45
3 resp. 9 month low (Xetra) [EUR] 2.53 3.43 2.53 3.43
Open at beginning of period (Xetra) [EUR] 3.69 4.40
Close at end of period (Xetra) [EUR] 3.35 4.08
Market capitalisation at end of period [KEUR] 63,656 46,762
Daily turnover (Xetra, units) 9,318 6,252 10,475 6,731
Development of important key figures
K E Y F I G U R E S1: This position does not include securities with a maturity > 3 months, since they are included in cash flows from investing activities (see cash flow statement). 2: According with the regulations of Deutsche Börse (stock exchange) in Frankfurt concerning the determination of the percentage of freely tradeable shares, the free
float of 4SC AG is only about 25.4%. Accordingly, all of the shareholder’s shares that make up an aggregate of at least 5% of a corporation’s capital stock alloc-able to a share category are deemed to be largely held.
3: On 30 September 2007 shares issued in the context of the capital increase carried out on 7 September 2007 (33% of total stock, i.e. 6.333.942 new shares) were not yet approved for trading at Frankfurt Stock Exchange. Approval was granted on 19 October 2007.
110%
100%
90%
Jan Feb Mar Apr May Jun Jul Aug Sep
4SC AG has posted results largely in line with estimates so far this financial year. Substan-tial progress has also been made with the pro-ject pipeline, though this has not yet transla-ted into revenues. Building up a large pipeline of promising drug candidates for the phar-maceutical industry has always been our pri-mary lever for enhancing enterprise value, an endeavour in which great headway has been made.
As you know, there are currently six projects in our pipeline in various different stages of development. Our main focus at present is na-turally on the clinical phase IIa study of our drug candidate SC12267. The last of a total 121 participating patients with active rheu-matoid arthritis was released from the study in early October. This puts us precisely on schedule, with results expected to be an-nounced before the end of this year.
Proof of concept study results expected soon
We are very much looking forward to the study results, which, if positive, should consi-derably enhance the attractiveness of this drug candidate for the pharmaceutical indus-try. Even now, there is no lack of interest in the substance, due in part to its proven po-tential with other indications such as multiple sclerosis and chronic inflammatory bowel diseases. Should SC12267 prove as effec-tive as is anticipated, we hope to be able to conclude a substantial licensing agreement for it.
The 4SC AG business model is not only based around a single promising project, however. Drug candidate SC68896 for exam-ple, designed for the treatment of hemato-poietic and solid tumours, is in advanced pre-clinical studies, thus nearing readiness for clinical trials. This is also the case for a back-up substance from our NFκB project for chro-nic inflammatory bowel diseases. Due to its better bioavailability, we will now be moving forward with the substance SC71492, to-wards clinical study, instead of the previously nominated SC71570. Comprehensive precli-nical studies are in planning for the protein ki-nase blocker SC71710 from the 4iP project, developed jointly with the Freiburg company ProQinase, after its having proven to be the most effective growth inhibiting substance thus far for acute myeloid leukaemia in animal cancer trials.
Successful capital increase ensures rapid pipeline development
The capital increase conducted in September creates a solid basis for the continued deve-lopment of our pipeline. It enables us to vigo-rously pursue our more advanced projects. This capital increase was in response to interest expressed by what is now the com-pany's largest shareholder. The sharehol-der concerned is Santo Holding, the invest-ment company owned by Hexal founders Dr Thomas and Dr Andreas Strüngmann. The 4SC AG Management Board was pleased to welcome the Strüngmann brothers on board, who are known as long-term strategic inves-tors with extensive industry expertise and contacts. The involvement of these investors in 4SC AG is an unambiguous indication of our company’s potential.
Dear Shareholders,
S H A R E H O L D E R S ’ L E T T E R Dr Ulrich Dauer, Chief Executive OfficerNew opportunities are also opening up for us through partnerships with other companies in the Santo portfolio, such as with the Wupper-tal company AiCuris GmbH & Co. KG on anti-infective drug research. We thus see the in-vestment by Santo as an opportunity for our firm in this respect as well.
In mid-October Santo Holding notified us of having exceeded the threshold of 30% ownership of company equity, legally consti-tuting control of the company. As a result, Santo is obligated to make a tender offer to shareholders within the next few weeks. The 4SC AG Management Board will be announ-cing its response to the offer, once it is made, at the appropriate time, giving firm consideration to the interests of the com-pany and our shareholders.
We would like to thank you, our shareholders, for the confidence you have placed in us and for sharing our vision of the potential of 4SC AG.
Dr Ulrich Dauer Chief Executive Officer
Q U A R T E R L Y M A N A G E M E N T R E P O R T | P R E S E N T A T I O N O F T H E C O U R S E O F B U S I N E S S
1.1 Economic development and development of stock exchange segments
If one follows the opinion of the International Monetary Fund (IMF), the global economy is still “on course” despite the current turbu-lence on the financial markets. Only the pace of growth will slacken off, which will, for exam-ple, make itself felt in correspondingly down-wards adjusted growth forecasts for 2008. This is similar to the interpretation of German economic research institutes, which admit-tedly certify a somewhat downbeat mood, but still anticipate the robust growth of the Ger-man economy. Thus, for instance, the Ifo in-stitute is sticking by its growth forecast for 2007 of 2.5%. Though all the institutes have noticeably downgraded their optimistic fore-casts for 2008.
Estimates with regard to the key risks for the world economy remain unchanged. Thus, above all the continuing sharp increase in prices of energy and essential raw materials and a resulting rise in inflation could make themselves felt by stunting economic growth. In addition, the still unbroken downward trend of the US dollar versus the Euro poses a fur-ther challenge for Germany and Europe. The development of international stock mar-kets was characterised by one catchword in the previous quarter that has temporarily caused a drastic downturn on all the indexes, namely the subprime crisis in the USA. Nevertheless, it must be emphasised that despite the economic magnitude of this cri-sis the indexes have recovered surprisingly quickly. Thus, the lead index DAX and the Tec-DAX could still post a plus of 18.8% or even 28.8% at the end of the third quarter com-pared to the start of the year. In the third quar-ter the trend of - 1.4% on the DAX and 3.9%
on the TecDAX was still acceptable against the said background, with the two indexes clo-sing at 7,861.51 and 966.06 points respec-tively.
The picture amongst the representative bio-tech indexes is somewhat more differentia-ted; thus the American indexes continued their rallying trend. The NASDAQ Biotechno-logy Index and the AMEX BiotechnoBiotechno-logy Index have risen by 6.2% and 8.9% respectively since the start of the year and in the course of the third quarter they rose by 5.7% to 852.59 points and by 5.7% to 821.72 points. The German Prime IG Biotechnology Perfor-mance Index did not find it as easy to cope with the market trend as well as some nega-tive news from the industry. More than a few investors withdrew their trust in the German biotech industry, which led to a negative trend of - 3.1% compared to the start of the year and - 6.7% in the course of the third quarter. The Prime IG closed at 196.16 points. In branchspecific terms there has seldom been such an ambivalent quarter as the last one. Whilst at the end of the second and be-ginning of the third quarter some mainly Ger-man torchbearers unsettled an already ner-vous environment with bad tidings that at-tracted a lot of attention, the trend clearly turned to the positive in the course of the quarter under review. Therefore, there were numerous success stories in all key develop-ment segdevelop-ments, such as, for example, bio-tech/pharma cooperations, strategic growth and consolidation, patent approvals and mile-stones with regard to product developments. A particularly satisfying development involved Santo Holding (Deutschland) GmbH, a large German investor, which had communicated its commitment to biotechnology and put this into action.
1. Presentation of the course of business
However, it will still be necessary to pay close attention to how the large pharma and biotech companies develop in the near fu-ture. Thus, a trend has recently emerged with the increased job cuts and reduced forecasts that could equally constitute a risk or oppor-tunity for the biotech industry.
Last but not least, the German government has been giving very mixed signals about its support of the German biotech industry. Whilst on the one hand the industry is to be teamed more with academic institutions through new promotion schemes, in order to strengthen the industry’s position, the go-vernment has missed a big opportunity with the company tax reform and the MoRaKG (Law for the Modernization of the Basic Con-ditions for Private Equity Participation). In-stead, the financial/tax environment has been made considerably more complicated and is above all more unattractive than was pre-viously the case. Negative longterm conse-quences will be inevitable in this case if the law is implemented as planned.
W i t h S a n t o H o l d i n g ( D e u t s c h l a n d ) G m b H , a l a rg e G e r m a n i n v e s t o r h a s c o m m u n i c a t e d i t s
c o m m i t m e n t t o b i o t e c h n o l o g y a n d p u t t h i s i n t o a c t i o n .
1.2 Development of the company 1.2.1 Research and development (Drug discovery & development)
In its most promising segment “Drug Disco-very & Development“, 4SC AG concentrated in the past quarter on the active further de-velopment of its portfolio of currently six re-search and development projects on the indi-cations of autoimmune diseases and cancer. The lead compound SC12267 is currently un-dergoing a clinical proof of concept study (phase IIa), in which the clinical efficacy and tolerability of this drug candidate is being tes-ted in the treatment of patients with active rheumatoid arthritis. The last of a total of 121 participating patients was released from the study at the beginning of October. The so-called inlife phase was therefore concluded according to schedule. In this three-tiered, placebo-controlled study, patients were ad-ministered two doses of SC12267 orally every day for a period of three months. The study was carried out at 13 centres in
Ger-many, Poland and Serbia. The study results are expected in the fourth quarter of 2007. The broad therapeutic potential of SC12267 was also further underpinned in several pre-clinical studies for chronically inflammatory in-testinal models and inflammatory skin dis-eases. This data, together with the experi-ences from the current phase IIa study, formed the basis for swift clinical develop-ment in other indications.
The proteasome inhibitor SC68896, which in view of its good activity in preclinical models for a series of haematopoietic and solid tu-mours is to be developed as an oncological therapeutic substance, is undergoing ad-vanced preclinical processing. At present, the therapeutic potential of the substance is fur-ther characterised in a model for difficult-to-treat brain tumours (glioblastoma). The focus is also on preparing a formulation for syste-mic applications.
Once the proof of concept could be demon-strated for the substance SC71570 in va-rious animal models to combat chronically in-flammatory intestinal diseases and rheuma-toid arthritis, further derivates of this chemi-cal class were examined, especially with re-gard to their pharmacokinetic properties. It transpired that the backup substance SC71492 offers significant advantages com-pared to SC71570, especially with regard to its bioavailability. This compound is currently being manufactured in large quantities, in or-der to therefore carry out the preclinical stu-dies required for clinical development. The substance SC71710 is also approaching the clinical testing phase. This is a protein ki-nase blocker developed with ProQiki-nase
GmbH from Freiburg, Germany, which recent-ly displayed highrecent-ly promising efficacy in an an-imal cancer model. The substance has so far proven to be the most potent inhibitor of the growth of acute myeloid leukaemia (AML) cells of the type MV4-11. The synthesis of adequate quantities of preclinical material has started and is likely to be concluded by the end of the year.
Progress could also be made in the direction of clinical development with the antiviral sub-stance SC75741. SC75741 is a drug candi-date that has demonstrated a high level of ac-tivity against the bird flu virus (H5N1). In co-operation with the University of Münster, 4SC AG has shown that SC75741 – contrary to previous therapeutic substances for in-fluenza – can cure mice infected with H5N1, even if the therapy only starts four days after the infection. Further investigations for safe-ty and tolerabilisafe-ty have started.
In the case of the project to develop new kinds of ion channel blockers of the Kv1.3 channel supported by the Federal Ministry of Education and Research (BMBF) as part of the "BioChancePLUS“ programme, 4SC AG has stepped up its activities to optimise the pre-viously developed lead compounds. The aim of the project is the development of new the-rapies to treat multiple sclerosis.
Three further projects which are still at a very early stage of development in the fields of flammatory diseases, cancer therapy and in-fection research are currently being tested by 4SC scientists. These projects could gradu-ally further reinforce the project pipeline of 4SC AG in the future. Q U A R T E R L Y M A N A G E M E N T R E P O R T | P R E S E N T A T I O N O F T H E C O U R S E O F B U S I N E S S T h e l a s t o f a t o t a l o f 1 2 1 p a r t i c i p a t i n g p a t i e n t s w a s r e l e a s e d f ro m t h e c l i n i c a l p h a s e I i a s t u d y a t t h e b e g i n n i n g o f O c t o b e r.
1.2.2 Research collaborations (Collaborative business)
Cooperation with the US-American QuoNova LLC. in Melbourne, Florida, USA, is based on the quorum sensing modulators developed by 4SC AG, which were sold in December last year to the newly established QuoNova LLC. Within the scope of this cooperation, 4SC AG provides QuoNova LLC. to a substantial ex-tent with research capacity for the further de-velopment of these modulators, as well as for the manufacturing and characterisation of new modulators.
1.2.3 Personnel
In the quarter under review the company appointed a research scientist for the "Drug Supply" department as well as a receptio-nist. Consequently, on 30 September 2007 4SC AG employed a total of 63 employees (in-cluding the Management Board); in the pre-vious year 59 employees were reported at this time.
46 employees were employed in the Re-search and Development segment, 15 in the Administration and Distribution segment and two in the Information Technology segment.
Q U A R T E R L Y M A N A G E M E N T R E P O R T | P R E S E N T A T I O N O F T H E S I T U A T I O N
2. Presentation of the situation
2.1 Earnings position
Net sales in the third quarter of 2007 amoun-ted to KEUR 325 and were as a result 55.9% below the sales of the same period in 2006 (KEUR 737). The background: In the year-ear-lier quarter 4SC AG had been able to book a one-off payment arising from the success-fully concluded research cooperation with Sanwa Kagaku Kenkyusho Co., Ltd., Nagoya, Japan. In the period July to September 2007 the net sales also originated from the “Colla-borative Business” segment and were achie-ved primarily in the context of the research and development cooperation with QuoNova LLC., Melbourne, Florida, USA. In the first nine months of 2007 total sales amounted to KEUR 960 and were as a result 45.7% below those of the first nine months of 2006 (KEUR 1,769).
As the majority of the costs in the same peri-od last year were caused by the preparation for the clinical phase IIa trial of the drug can-didate SC12267, the research and develop-ment costs in the third quarter of 2007 de-creased by 7.4% to KEUR 1,474 (third quar-ter 2006: KEUR 1,592). Cumulatively the ex-penses at KEUR 4,711 are still 9.5% higher than in the first nine months of 2006 (KEUR 4,304). The background to this are above all the increased costs for the current preclinical and clinical studies for the various develop-ment substances of 4SC AG as well as higher patent costs – caused by a growing number of patents entering the national registration process.
The administrative costs in the third quarter of KEUR 613 were 32.1% higher than those in the same period last year (KEUR 464). In addition to increased legal and consulting
costs in connection with an application for a grant in the USA, a sharp increase in person-nel costs was posted. The reason here was essentially personnel expenses due to share options, which however have no cash effect, as well as new recruitments compared to the previous year, such as a newly created posi-tion for quality assurance in January 2007. Consequently, the administrative costs in the entire first nine months of the year at KEUR 1,905 were also 18.0% higher than in the same period last year (KEUR 1,615). Thus the result from operating activities for the third quarter 2007 was KEUR - 1,944 after KEUR - 1,599 in the same period last year. For the first nine months of 2007 the result from operating activities was KEUR - 6,203 compared to KEUR - 5,072 in the same period last year.
The financial result in the quarter under review was KEUR - 4 after KEUR - 1 last year. Finan-cial income increased from KEUR 52 to KEUR 89, above all thanks to the interest-bearing vestment of revenue from the capital in-crease. However, at the same time the finan-cial expenses also increased from KEUR 53 to KEUR 93, mainly due to the foreign cur-rency losses from the US dollar. Cumulative-ly the financial result at KEUR 14 is KEUR 4 higher than last year’s figure. Here too the in-crease in financial income from KEUR 154 to KEUR 245 contrasted with a rise in financial expenses to KEUR 180 (previous year KEUR 144) as well as a proportional loss of KEUR 51 (previous year EUR 0) resulting from financial investments accounted for by the equity method in connection with the associ-ated company QuoNova LLC.
Q U A R T E R L Y M A N A G E M E N T R E P O R T | P R E S E N T A T I O N O F T H E S I T U A T I O N
KEUR 12,668 initially and finally to KEUR 19,002.The number of shares rose analo-gously from 11,461,365 to 12,667,884 in May and finally to 19,001,826 common bea-rer shares in September 2007. The shares of the capital increase of 21 May 2007 were placed at a price of EUR 2.80 per share, and those of the capital increase of 7 September at a price of EUR 2.65 per share. Conse-quently, 4SC AG obtained KEUR 20,163 gross from both transactions, with which the company will further develop the existing pro-ject pipeline and expand it with new propro-jects. In this way the loss of more than half of the share capital which has existed since 31 March 2007 based on the HGB figures could also be eradicated.
The non-current assets declined compared to 31 December 2006 from KEUR 4,177 to KEUR 3,580. The background was the re-duction of the non-current accounts receiv-ables from associated companies, the ex-pected lower valuation of the investments accounted for by the equity method (QuoNova LLC.) and the scheduled deprecia-tion of the property, plant and equipment. On the other hand, current assets rose from KEUR 5,796 at the end of the previous year to KEUR 20,402 on 30 September 2007. The main influencing factor is the increase in cash and securities from KEUR 4.471 to KEUR 19.361 through capital measures. At the same time, the trade accounts receivables were reduced from KEUR 134 to KEUR 9 and the current accounts receivables from associated companies from KEUR 518 to KEUR 377.
The period result for the third quarter of 2007 was KEUR - 1,948 after KEUR - 1,600 in the comparable period last year. In the first nine months of the year, the period result amoun-ted to KEUR - 6,189 compared to KEUR - 5,062 in the same period in 2006.
The undiluted and diluted earnings per share were with EUR - 0.14 in the quarter under re-view exactly at the same level as last year and amounted to EUR - 0.49 accumulated after EUR - 0.46 in the first nine months of 2006.
2.2 Net assets position
The company’s net assets position developed in a clearly positive manner in the course of the capital increases for cash with subscrip-tion rights carried out on 21 May 2007 and on 7 September 2007. The share capital of the company increased from KEUR 11,461 to
The development of the equity also reflects the influence of capital increases. Thus, the total of subscribed capital and additional paid-in capital paid-increased from KEUR 28,068 on 31 December 2006 to KEUR 47,860 on 30 Sep-tember 2007. The transaction costs connec-ted with the capital measures of KEUR 533 were set off according to IAS 32.35 directly against the additional paid-in capital. As a re-sult of the negative period rere-sult of KEUR 6,189, the equity at the end of the quarter un-der review amounted to KEUR 21,457 after KEUR 7,854 on 31 December 2006. Conse-quently, the equity ratio on 30 September 2007 rose to 89.5% after 78.8% on 31 De-cember 2006.
Non-current liabilities increased slightly from KEUR 830 at the end of the previous year to KEUR 846 at the end of the quarter under re-view. At the same time current liabilities in-creased from KEUR 1,289 to KEUR 1.679. The reason for this is the increase in provi-sions from KEUR 564 to KEUR 1,229, mainly due to existing obligations from third-party service agreements as well as legal and con-sultancy services not yet billed. The trade accounts payables could be reduced as per the cut-off date on 30 September 2007 to KEUR 258 (31 December 2006: KEUR 499). The balance sheet total increased due to the described effects to KEUR 23,982 on 30 September 2007 after KEUR 9,973 on 31 December 2006. T h e c o m p a n y ’s n e t a s s e t s p o s i t i o n d e v e l o p e d i n a c l e a r l y p o s i t i v e m a n n e r i n t h e c o u r s e o f t h e c a p i t a l i n c r e a s e s i n c a s h w i t h s u b s c r i p t i o n r i g h t s .
Q U A R T E R L Y M A N A G E M E N T R E P O R T | P R E S E N T A T I O N O F T H E S I T U A T I O N
2.3 Financial position
At the end of the quarter under review the stock of cash and cash equivalents amounted to KEUR 18,600. Additional funds of KEUR 761 are invested in fixed and floating-rate se-curities (31 December 2006: KEUR 1,949), so that liquid funds and near-term money amounting to KEUR 19,361 are available (31 December 2006: KEUR 4,471).
The cash flows from operating activities amounted in the first nine months of 2007 to KEUR - 4,644. The decline in accounts recei-vables and the increase in provisions and de-ferred liabilities ensure that these cash flows only fall short of the previous year's figure of KEUR - 4,349 by KEUR 295 despite a KEUR 1,127 lower period result.
The cash flows from investment activities are strongly influenced by the purchases and sales of securities with a maturity of longer than three months. In the period January to September 2007, the company sold securi-ties to the net value of KEUR 1,186, but at the same time invested KEUR 94 in fixed and in-tangible assets, so that a capital inflow of KEUR 1,092 could be posted. In the same pe-riod last year, in addition to investments in in-tangible assets (KEUR 78) and fixed assets (KEUR 172), a capital outflow from invest-ments in longer term securities of KEUR 3,448 took place, whereby cash flows of KEUR - 3,698 arose in this segment. The cash flows from financing activities of KEUR 19,630 (net) resulted from the capital increases for cash of 21 May 2007 and of 7 September 2007. In the previous year KEUR 4,085 flowed into the company during the same period from the capital increase of 11 May 2006.
Q U A R T E R L Y M A N A G E M E N T R E P O R T | R I S K A N D C H A N C E R E P O R T | O U T L O O K
Compared to the reporting in the context of the annual report of 31 December 2006 and in the context of the interim report of 30 June 2007, the risk and opportunity position of 4SC AG has developed in a clearly positive manner in the estimation of the management. In particular, the capital increase, which was successfully concluded on 7 September 2007 with a gross capital inflow of EUR 16.8 mil-lion, significantly strengthened the company’s financial position and further strengthened the basis for reaching the aspired to corpo-rate targets. Thanks to the new injection of funds, the company will have additional room for manoeuvre when further developing the project pipeline and a stronger negotiating position vis-à-vis potential partners. In addi-tion, the liquidity range has significantly in-creased and the loss of more than half of the share capital was eradicated.
However, 4SC AG will continue to have a need for capital to realise its company goals. This will depend on various factors, especially whether it is possible to generate sufficient regular income from licensing or coopera-tions. The costs for product development could exceed this revenue, which would make raising additional equity or debt capital necessary.
The execution of the clinical phase IIa study for the most advanced drug candidate SC12267 has progressed positively so far and is still on track. The treatment of a total of 121 patients suffering from active rheu-matoid arthritis was completed according to plan at the beginning of October, so that the study results will probably be available in the fourth quarter. Positive study results would in-crease the goodwill. Nevertheless, the
com-pany can still not rule out the possibility that SC12267 might not display sufficiently strong activity in patients with rheumatoid arthritis in the final analysis or that unexpec-tedly unfavourable findings on tolerability might arise.
Contractually fixed payment agreements de-nominated in foreign currencies are subject to the current strong appreciation of the Euro, in particular against the US dollar. It is possible that these receivables cannot be hedged in an
economically viable manner and will lead, for instance, to value adjustments in the case of receivables in foreign currencies.
Current legislative developments as part of the company tax reform and the MoRaKG could result in not or not completely being ab-le to carry forward losses made by the com-pany in the future as a loss carryforward. The known risks regarding the use of loss carry-forwards generated in the past remain unaf-fected by this.
3. Risk and chance report
4. Outlook of further business development
The development of 4SC AG proceeded as faras possible according to plan in the first nine months of the 2007 business year. The esta-blishment of a comprehensive, effective pipe-line with drug candidates that are attractive for the pharmaceutical industry is and will re-main the primary goal of 4SC AG and a major lever for increasing the company value. In this respect the company has made good pro-gress so far. Management believes that the company’s business will continue to streng-then in both the short and medium term with the signing of new sales-generating licensing deals with partners in the pharmaceutical in-dustry and additional service and research collaborations.
T h e e s t a b l i s h m e n t o f a c o m p r e h e n s i v e , s u s t a i n a b l e p i p e l i n e w i l l r e m a i n
Q U A R T E R L Y M A N A G E M E N T R E P O R T | O U T L O O K | E V E N T S
The focus in the most important business segment “Drug Discovery & Development“ continues to be on the completion of the cli-nical phase IIa study for the drug candidate SC12267 for treating rheumatoid arthritis, which is planned for the fourth quarter of 2007. If the study results turn out to be posi-tive as expected, this should once again clearly increase the attractiveness of the drug candidate for potential licensees from the pharmaceutical industry. Subject to positive study data, the management is expecting to be able to outlicence SC12267 to a pharma-ceutical partner within a few months. There will also continue to be a lot of move-ment in the downstream project pipeline. On the one hand, SC12267 has considerable de-velopment potential in other indications, such as Colitis Ulcerosa and Morbus Crohn. On the other hand, 4SC AG will also swiftly further de-velop its projects with other promising drug candidates. Thus, three further projects of 4SC AG are at an advanced stage of preclini-cal studies and approaching clinipreclini-cal study readiness. The significantly improved finan-cial situation is a good basis for pushing ahead with these projects with urgency.
Further to the capital increase which took place on 7 September 2007 the new compa-ny prospectus was approved by the Federal Financial Supervisory Authority (BaFin) on 10 October 2007 and published by the com-pany immediately afterwards. Moreover, on 19 October the 6,333,942 new shares were approved for trading by the Frankfurt Stock Exchange under WKN 575381.
In addition, 4SC AG was informed by Santo Holding on 23 October 2007 that its propor-tion of voting rights in the company had ex-ceeded the threshold of 30% on 17 October 2007 and therefore currently amounts to 31.55% of the voting rights (5,994,711 vo-ting rights). Santo Holding (Deutschland) GmbH and Santo Holding AG have therefore acquired control within the meaning of § 29 (2) of the Securities Acquisition and Cor-porate Takeover Act (WpÜG). The resultant decision to submit a corresponding manda-tory offer to the shareholders of 4SC AG was
published by Santo Holding on 24 October 2007. Consequently a concrete mandatory takeover offer by Santo Holding can be ex-pected in the coming weeks.
5. Events after the end of the
reporting period
Management Board of 4SC AG (from left to right):
Dr Daniel Vitt, Dr Ulrich Dauer, Dipl.-Kfm. Enno Spillner and Dr Gerhard Keilhauer
Dr Gerhard Keilhauer, CDO
Dr Daniel Vitt, CSO Planegg-Martinsried, 5 November 2007
Dr Ulrich Dauer, CEO
I N T E R I M R E P O R T | O V E R V I E W
INTERIM REPORT OF 4SC AG
(IFRS)
I N C O M E S T A T E M E N T in KEUR 20070701 20060701 20070101 20060101 -2007-09-30 2006-09-30 2007-09-30 2006-09-30 Notes Net sales 325 737 960 1,769 Cost of sales - 94 - 166 - 285 - 474 Gross profit 231 571 675 1,295 Distribution costs - 78 - 94 - 246 - 311
Research and development costs - 1,474 - 1,592 - 4,711 - 4,304
Administrative costs - 613 - 464 - 1,905 - 1,615
Other operating income 23 6 83 17
Other operating expenses - 33 - 26 - 99 - 154
Result from operating activities - 1,944 - 1,599 - 6,203 - 5,072
Financial result
Result from an associate accounted
for by the equity-method 0 0 - 51 0
Finance income 89 52 245 154
Finance expenses - 93 - 53 - 180 - 144
Financial result - 4 - 1 14 10
Period result - 1,948 - 1,600 - 6,189 - 5,062
Earnings per share
(undiluted and diluted) [EUR] - 0.14 - 0.14 - 0.49 - 0.46 3.
Income statement
B A L A N C E S H E E T | A S S E T S
Balance sheet – Assets
for the period ended 30 September 2007 (unaudited)in KEUR 2007-09-30 2006-12-31
ASSETS
Non-current assets
Intangible assets 1,863 1,875
Fixed assets 1,032 1,230
Investments accounted for by the equity-method 0 51
Accounts receivables from associated companies 685 1,021
Total non-current assets 3,580 4,177
Current assets
Inventories 20 17
Trade accounts receivables 9 134
Accounts receivables from associated companies 377 518
Cash 17,307 464
Securities 2,054 4,007
Other current assets 503 550
Prepaid expenses and accrued income 132 106
Total current assets 20,402 5,796
Balance sheet – Equity and liabilities
for the period ended 30 September 2007 (unaudited)in KEUR 2007-09-30 2006-12-31
EQUITY AND LIABILITIES Equity
Subscribed capital 19,002 11,461
Additional paid-in capital 28,858 16,607
Retained earnings 67 67 Loss carryforward - 20,281 - 14,741 Period result - 6,189 - 5,540 Total equity 21,457 7,854 Non-current liabilities Long-term loans 846 830
Total non-current liabilities 846 830
Current liabilities
Provisions and deferred liabilities 1,229 564
Trade accounts payable 258 499
Accounts payable to associated companies 0 29
Down payments received 30 37
Other current liabilities 162 160
Total current liabilities 1,679 1,289
TOTAL EQUITY AND LIABILITIES 23,982 9,973
C A S H F L O W S T A T E M E N T
Cash flow statement
for the period from 1 January to 30 September 2007 (unaudited)
2007-01-01 - 20060101
-in KEUR 2007-09-30 2006-09-30
Cash flows from operating activities:
Period result before taxes - 6,189 - 5,062
Corrections for:
Depreciation on fixed assets and intangible assets
and impairment of goodwill 304 486
Non-cash affecting expenses and income 118 55
Financial result - 14 - 10
Interest received 154 94
Interest paid - 27 - 27
Decrease / Increase of trade accounts receivables 125 - 131
Decrease of accounts receivables from associated Companies 477 59
Increase of Inventories - 3 - 2
Decrease / Increase of other current assets 47 - 123
Increase / Decrease of prepaid expenses and accrued Income - 26 114
Decrease of trade accounts payable - 241 - 30
Decrease of accounts payable to associated companies - 29 - 29
Decrease / Increase of down payments received - 7 256
Increase of provisions and deferred liabilities 665 112
Increase / Decrease of other current liabilities 2 - 111
Cash flows from operating activities: - 4,644 - 4,349
Cash flows from investing activities:
Purchase of intangible assets - 1 - 78
Purchase of fixed assets - 93 - 172
Purchase of securities (maturity > 3 months) - 363 - 3,448
Sales of securities (maturity > 3 months) 1,549 0
Cash flows from investing activities: 1,092 - 3,698
Cash flows from financing activities:
Payments to subscribed capital 7,541 931
Payments to additional paid-in capital 12,089 3,154
Cash flows from financing activities: 19,630 4,085
Net change in cash and cash equivalents 16,078 - 3,962
C A S H F L O W S T A T E M E N T
Cash flow statement
for the period from 1 January to 30 September 2007 (unaudited)
2007-01-01 - 20060101
-in KEUR 2007-09-30 2006-09-30
Cash 17,307 565
Securities 2,054 5,799
./. maturity > 3 months - 761 - 3,448
Cash and cash equivalents 18,600 2,916
For the reason of comparability the securities purchased with a maturity of more than three months, which were reported as part of the cash and cash equivalents in the previous year, were re-classified as cash flows from investing activities. In the previous year, for the period 1 January 2006 to 30 September 2006 cash flows from investing activities which amounted to KEUR - 250, a net change in cash and cash equivalents amounting to KEUR - 514, as well as cash and cash equivalents at the end of the period amounting to KEUR 6,364 were reported.
This re-classification was similarly applied to the following table. The cash and cash equivalents break down as follows:
S T A T E M E N T O F C H A N G E S I N E Q U I T Y
Statement of changes in equity
for the period from 1 January to 30 September 2007in KEUR
Balance on 2006-01-01 10,530 13,172 11 120 67 - 14,741 9,159
Issued options (ESOP 2001 / 2003) 12 12
Issued options (ESOP 2004 / 2004) 11 11
Issued options (ESOP 2004 / 2005) 10 10
Capital increase of 11 May 2006 931 3,154 4,085
Issued options (ESOP 2004 / 2006/1) 2 2
Issued options (ESOP 2006 / 2006/2) 9 9
Issued options (ERSATZ-ESOP 2001 / 2006/3) 6 6
Period result 2006-01-01 – 2006-09-30 - 5,062 - 5,062
Balance on 2006-09-30 11,461 16,326 11 170 67 - 19,803 8,232
Balance on 2007-01-01 11,461 16,361 11 235 67 - 20,281 7,854
Issued options (ESOP 2001 / 2003) 4 4
Issued options (ESOP 2004 / 2004) 11 11
Issued options (ESOP 2004 / 2005) 11 11
Issued options (ESOP 2004 / 2006/1) 4 4
Issued options (ESOP 2006 / 2006/2) 80 80
Issued options (ERSATZ-ESOP 2001 / 2006/3) 52 52
Capital increase of 21 May 2007 1,207 1,782 2,989
Capital increase of 7 September 2007 6,334 10,307 16,641
Period result 2007-01-01 – 2007-09-30 - 6,189 - 6,189
Balance on 2007-09-30 19,002 28,450 11 397 67 - 26,470 21,457
1: WSV = convertible bonds; 2: ESOP = Employee stock option programme for employees and Management Board
Subscribed capitalAdditional paid-in capital shar es
Additional paid-in capital WSV 1
Additional paid-in capital ESOP 2
Retained earningsLoss carryfor war
d /
Period r esult
N O T E S
Notes
to the interim report dated 30 September 2007
1. Basis of valuation and significant accounting and valuation policies 1.1 Basis of valuation
This interim report has been prepared entirely in accordance with the accounting principles of the International Financial Re-porting Standard (IFRS) and of IAS 34 (Interim Financial ReRe-porting) in accordance with the requirements of the International Ac-counting Standards Board (IASB). The recommendations of the Standing Interpretations Committee (SIC) and the International Financial Reporting Interpretations Committee (IFRIC) have been taken into account. All of the IFRS adopted by the European Commission have been taken into account.
In the preparation of the interim report, Management had to make a number of estimations and assumptions exerting an in-fluence on the disclosed value of assets and liabilities on the balance sheet date, and on expenditure and revenue within the reporting period. The actual value may deviate from these estimates. The discretionary decisions taken correspond to the Fi-nancial Statements for the year up to 31 December 2006.
This interim report represents the individual Financial Statements of the Germany-based 4SC AG, and in addition to 4SC AG, also takes account of the associated companies, quattro research GmbH, Planegg-Martinsried and QuoNova LLC., Melbour-ne, Florida, USA.
The interim report was approved for publication by the Management Board on 5 November 2007.
1.2. Significant accounting and valuation policies
The applied accounting and valuation policies correspond to those used for the Financial Statements for the year ending 31 De-cember 2006.
The German “Bundesrat” decided on 6 July 2007 in his sitting about the corporation tax reform 2008. As part of the regulations being effective as of 1 January 2008 the corporation tax rate will be reduced from 25% to 15% with a moderate rise in the effective trade income tax rate. On the refinancing measures is a limit with regard to the deductibility of the business expenses. These new regulations will have effect on the company but are not recognized within this interim financial report.
2. Segment report
4SC AG operates in the two business segments of “Drug Discovery & Development” and “Collaborative Business”. In the “Drug Discovery & Development” segment, 4SC AG has specialised in research and development of novel therapeutic drugs to com-bat chronic inflammatory diseases and cancer. The objective of the “Drug Discovery & Development“ segment is to realise the commercial potential of the sustainable project pipeline put in place by 4SC AG by means of licensing contracts concluded with the pharmaceutical industry. 4SC AG is the holder of proprietary and patent rights and takes the decisions on the pro-gress of projects. In the “Collaborative Business“ segment, within the context of collaborative agreements, 4SC AG makes its technology platform available to partners and customers from the pharmaceutical and biotechnology industry, in the form of a service package. The collaborative partner is the holder of proprietary and patent rights and takes decisions on the progress
N O T E S
Segment report according to business segments:
in KEUR Drug Discovery Collaborative Not Consolidated
& Development Business assigned
01-01 - 09-30 01-01 - 09-30 01-01 - 09-30 01-01 - 09-30 2007 2006 2007 2006 2007 2006 2007 2006 Net Sales 0 76 960 1,693 0 0 960 1,769 Personnel expenses - 1,530 - 1,352 - 314 - 394 - 1,172 - 985 - 3,016 - 2,731 Depreciation - 205 - 263 - 51 - 141 - 48 - 82 - 304 - 486 Other income and expenses - 2,638 - 2,203 - 214 - 480 - 991 - 941 - 3,843 - 3,624
Segment result / Result from
Operating activities - 4,373 - 3,742 381 678 - 2,211 - 2,008 - 6,203 - 5,072 Financial result 14 10 Period result - 6,189 - 5,062 Other information: Segment assets 1,813 893 208 715 21,961 8,968 23,982 10,576 Segment liabilities 30 256 0 0 2,495 2,088 2,525 2,344 Investments 51 151 19 34 24 65 94 250
In particular, administrative costs are not assigned. Net sales are realised and shown both with external customers and with the as-sociated company QuoNova LLC., Melbourne, Florida, USA.
Net sales according to headquarters of the performance recipient:
in KEUR USA Germany Japan Consolidated
01-01 - 09-30 01-01 - 09-30 01-01 - 09-30 01-01 - 09-30
2007 2006 2007 2006 2007 2006 2007 2006
Net sales 923 75 37 853 0 841 960 1,769
N O T E S
3. Earnings per share
The undiluted earnings per share are calculated in accordance with IAS 33.9 et sqq. by dividing the period result attributable to the shareholders (numerator) by the average weighted number of shares in circulation in the reporting period (denomina-tor). The basis for the second quarter of 2007 is provided by a total number of shares of 14,356,935, and 11,461,365 shares for the same period of the previous year. In the first nine months of 2007, the average number of shares stands at 12,605,299 compared with 11,012,967 in the first nine months of 2006.
Since, as a result of the loss situation at 4SC AG, the options issued will not have a diluting effect, diluted earnings per share correspond to the undiluted earnings.
4. Financing measures
Additionally to the capital increase completed on 21 May 2007, in which the 4SC AG accrued 4.3 million euros gross by issuing 1,206,519 shares at a price of EUR 2.80 per share, the company was able to complete a further capital increase on 7 September 2007. By issuing 6,333,942 shares at a price of EUR 2.65 per share, the company accrued 16.8 million euros gross. With this corporate action the company was responding to the substantial demand of an investor.
The effects of this capital increase on the net assets and financial position of 4SC AG are explained in the interim management report under points 2.2 and 2.3.
5. Share property and directors’ dealings
Broken down by individual members of the Management and Supervisory Board, the share and options property of 4SC AG on the reference date of 30 September 2007 are stated as follows:
Share property 2007-09-30 Maximum
Quantity Options number of
Options Options exercised subscribable
Shares total of 2007 in 2007 shares
Management Board
Dr Ulrich Dauer 410,639 40,600 0 0 35,800
Dr Gerhard Keilhauer 13,537 71,500 0 0 66,700
Dipl.-Kfm. Enno Spillner 9,600 138,000 0 0 124,800
Dr Daniel Vitt 396,803 40,600 0 0 35,800
830,579 290,700 0 0 263,100
N O T E S
The stock of shares assigned to the member of the Management Board Enno Spillner includes 750 shares that he acquired for his dependent children in the context of the capital increase, dated 7 September 2007.
The former member of the Management Board, Dr Stefan Busemann holds 27,600 options from previous years with sub-scription rights to a maximum of 13,800 shares.
As a part of the options has a subscription ratio of 2:1, the number of subscribable shares is lower than the total amount of options issued.
The following notifiable transactions in shares or options of 4SC AG were carried out by officers in the third quarter of 2007 according to § 15a of the German Securities Trading Act (WpHG):
• The Management Board member Dr Gerhard Keilhauer exercised his subscription right in the context of the capital in-crease. On 27 August 2007 he acquired 4,512 shares at EUR 2.65 per share via over-the-counter trading with a total trans-action volume of KEUR 12 (DGAP notification of 7 September 2007).
• The chairman of the Supervisory Board Dr Jörg Neermann also exercised his subscription right within the context of the capital increase. On 3 September 2007 he acquired 7,375 shares at EUR 2.65 per share via over-the-counter trading with a total transaction volume of KEUR 20 (DGAP notification of 7 September 2007).
• The Chief Executive Officer Dr Ulrich Dauer also exercised his subscription right within the context of the capital increase. On 4 September 2007 he acquired 7,547 shares at EUR 2.65 per share via over-the-counter trading with a total trans-action volume of KEUR 20 (DGAP notification of 6 September 2007).
• In addition, Dr Jörg Neermann acquired a further 54,875 shares at EUR 2.65 per share via over-the-counter trading with a total transaction volume of KEUR 145 through the subscription of shares within the context of the capital increase on 7 Sep-tember 2007 (DGAP notification of 11 SepSep-tember 2007).
• The Management Board member Enno Spillner acquired 2,184 shares at EUR 2.65 per share via over-the-counter trading with a total transaction volume of KEUR 6 through the subscription of shares within the context of the capital increase on 7 September 2007 (DGAP notification of 13 September 2007).
• Enno Spillner also subscribed for his dependent children Lena Spillner, Paula Spillner and Hanna Spillner 250 shares each at EUR 2.65 per share via over-the-counter trading with a total transaction volume of KEUR 1 each on 7 September 2007 within the context of the capital increase. (DGAP notification of 13 September 2007).
• On 28 September 2007, the Supervisory Board member Robert O’Connell acquired 8,900 shares at EUR 3.32 per share on the London Securities Exchange with a total transaction volume of KEUR 30 (DGAP notification of 1 October 2007).
N O T E S
6. Employees’ subscription rights
As an instrument aimed at increasing the motivation of 4SC AG employees, since the 2001 financial year, at least once per year, stock options have been granted to all active employees to subscribe to 4SC AG shares.
As at 30 September 2007, the total number of all stock options issued to employees (not including the Management Board) breaks down as follows:
1: For the tranches affected by the capital reduction in December 2004, the subscription ratio is 2:1
2: After finalising the annual accounts options of the “ESOP 2004” were reissued to a former employee, who is still operating as consultant for the 4SC AG. Stock option programme ESOP 2001 2001/1 01-03-31 9,60 2:1 6 0 0 6 6 3 ESOP 2001 2001/2 01-10-10 9,60 2:1 0 0 0 0 0 0 ESOP 2001 2002 02-06-30 12,00 2:1 12 1 0 11 11 6 ESOP 2001 2003 03-09-30 5,08 2:1 65 10 0 55 40 28 ESOP 2004 2004 04-09-30 4,24 2:1 72 0 0 72 33 36 ESOP 2004 2005 05-09-30 4,24 2:1 72 0 0 72 0 36 ESOP 2004 2006/1 06-05-30 4,53 2:1 0 0 0 0 0 0 ESOP 2006 2006/2 06-08-25 3,80 1:1 124 7 0 117 0 117 ERSATZ-ESOP 2001 2006/3 06-08-25 3,80 1:1 101 0 0 101 0 101 Total 452 18 0 434 90 327
7. Events after the end of the reporting period
Further explanation regarding events after the end of the reporting period can be found in paragraph 5 of the management report. They have no direct effect on the net assets, financial and earnings position of the company.
Tranche Issuance Exer
cising price (EUR) subscription ratio
1
outstanding 2007-01-01 (k)forfeited 2007 2 (k)
exer
cised 2007 (k)
outstanding 2007-09-30 (k)exer
ciseable 2007-09-30 (k) max. number of subscribeable shar
es
Imprint
Editor 4SC AG / Am Klopferspitz 19a / 82152 Planegg-Martinsried
Conception/Text komm.passion Schumacher‘s AG
Design Angela Borsche / Werbeagentur Ursula Borsche GmbH
Investor Relations Bettina von Klitzing / E-Mail: [email protected]
Financial Calendar 2007
2007-03-29 Annual Report 2006
✓
2007-05-10 Quarterly Financial Report 2007 (Q1/2007)
✓
2007-05-31 Extraordinary Shareholders’ Meeting
✓
2007-06-29 Annual General Shareholders’ Meeting
✓
2007-08-09 Financial Report (half-year) 2007
✓
2007-11-08 Quarterly Financial Report 2007 (Q3/2007)
✓
2007-11-12 - Analyst Meeting: Deutsches Eigenkapitalforum,
2007-11-14 Congress Center Messe Frankfurt F I N A N C I A L C A L E N D A R / I M P R I N T
