The transition could enable the German company to reap the increased rewards associated with drug discovery. As part of the process, it has announced R&D costs in its pharmaceuticals division have more than trebled to €30.3m in 2006, and it is the company's services division that is picking up the tab. That growing part of the business contributed over 95 per cent of Evotec's total revenue in 2006 (€67.4m) and generates €23m profit. That represents a 5 per cent growth in revenue for the services division but the total cost of running the business adds up to €59.7m and the clear shortfall has led to losses of €36.7m. Challenges in the pharma industry are causing big pharma to increase outsourcing levels and build their pipelines through licensing and acquisitions. Evotec hopes that, thanks to its services-drug discovery hybrid busniess model, in the future it will be able to cash-in on one of its internal programmes in a lucrative license deal with big pharma. In the meantime, Evotec is happy to incur the increased costs and its strategy will remain for the services division pay for internal drug development. "In-licensing opportunities - even at early stages of development - have become increasingly scarce and licensing competition has driven up prices of drug candidates in early clinical or late preclinical development," said Evotec. "Companies supplying these candidates, such as Evotec, hence could benefit significantly. Evotec therefore believes that pharmaceutical companies will increase levels of outsourcing and will focus more on early stage external sources of innovation." Evotec admit that this business model incorporates more risk but also pointed to the hugely increased rewards as a driver. Currently, such a deal is most likely to involve the company's most advanced drug candidate, EVT 201. A novel insomnia drug, the GABA-A receptor modulator is currently in Phase II clinical trials. Evotec specialise in central nervous system disorders and has three drugs in clinical trials. EVT 101 is a NMDA inhibitor designed to treat Alzheimer's and / or neuropathic pain. The third drug, EVT 302 is a MAO-B inhibitor, which is involved in the breakdown of dopamine. "Amongst the most significant highlights in 2006 was the progress of our insomnia drug candidate EVT 201 for which Phase II data will be reported this year. This is an important value inflection point in the development of any drug," said Jörn Aldag, CEO of Evotec AG. As part of its focus on drug discovery, Evotec sold the tools and technologies part of its business, Evotec Technologies, to Perkin Elmer. The €23m deal was finalised in January this year. According to Evotec, the money from the deal leaves it in a "very solid position to expand and further develop our pipeline." This commitment to expand is clear from Evotec's recent acquisition of French pharma Neuro3d. Evotec said it has gained scientific assets rather than people as Neuro3d had no remaining employees. It now has: "a target that has potential for the treatment of a number of diseases of the central nervous system (CNS), a related compound library and up to €22m of net cash" said Evotec. Neuro3d's headquarters in Mulhouse will not be retained. Neuro3d specialised in developing drugs to treat depression, schizophrenia and anxiety. It had been searching for inhibitors of an enzyme called phosphodiesterase 2 (PDE2), in order to modulate dopamine levels in the brain.