Evotec SE Q4 FY2020 Earnings Call

Dear ladies and gentlemen, welcome to the conference call of Evotec SE. At our customer's request, this conference will be recorded. May I now hand you over to Werner Lanthaler, CEO, who will guide you through the conference. Please go ahead.

Thank you very much. Welcome to our annual report 2020, the data-driven R&D Autobahn to Cures. It's great that you're on this call, and thank you so much for following Evotec. If you go to Page 2 of the presentation that we put out there and that I invite you to follow throughout this conference call, let me first tell you that I'm here together with my team in Hamburg, and I'm very happy to be here with Enno, our CFO; to be here with our COO, Craig; and our CSO, Cord. And let me start by thanking the whole company but also my closest team for a very special 2020. We did what every company should do. We were looking for the opportunity within the global pandemic crisis. We were forced to reexamine all our processes and practices, and we did it. And we took the chance to take the very best out of this moment, and we want to keep the best practices for the time beyond the COVID crisis, which will come, and where we will come out of that crisis even stronger than ever before. With this, let me tell you that Evotec is in a strong situation, maybe it's fair to say that we're in a very strong situation. As I'm talking about the team, I would also like to highlight and congratulate Cord on his appointment to the German Council for Science and Humanities. This is fantastic for Germany, Europe, but also the world because with this, we bring a person who is really outstanding into the essential questions that will lead the industry forward, that will lead society forward, and with this, I'm very happy that we were able to see this appointment from Cord into this system. When you go to Page 4 of the presentation, I want you to see some of the highlights and also some of the lowlights that marked our last year. The data-driven Autobahn to Cures is very long and will only end once all currently untreatable diseases are cured. So let me first look back a bit into 2020, where you have seen many things happening. And these things are just the beginning that lead us on this R&D Autobahn forward, which is a multitrack Autobahn. 2020 is marked by very good progress in our co-owned pipeline, which is the essence of our business model. And here, we are very well on track to build the largest royalty pool in the industry that has ever been built. We saw new and extended innovative partnerships, especially in kidney diseases, in protein degradation, and also in rare diseases, and Cord will talk more about that. With Just-Evotec Biologics, we are gaining very strong momentum, and we see how disruptive novel technology can be in the world of biologics. And this is also the reason why our J.POD 1 is in full swing very soon in the second half of '21, and Craig will also talk about J.POD 2, which we have initiated. We saw multiple new and extended Evotec Execute integrated drug discovery and development alliances. And also here, you see a platform that becomes an essential innovation hub for the industry growing every day. We are very happy about the successful integration of our new modality gene therapy out of Orth in Austria. And you see the acceleration of our innovation platforms, which go from EVOcells, EVOpanOmics and EVOpanHunter, basically into a very long-term strategy, which we now call Action Plan 2025, and which is introduced this year into the operations of Evotec for the long strategy building of this company. We are very happy that our strategy, which we initiated about five years ago to build bridges is coming to a critical moment and also sees a lot of momentum where a translation from science to the industry via our industrial BRIDGEs is really fantastic for academia, but also for the industry. And last but not least, let me also, at this point in time, thank many of the long-term investors who endorse our strategy and make the company with us better every day. If you go to Page 5 of this presentation, you should appreciate that all guidance elements have been met comfortably despite the fact that we had many things to counterbalance, and don't forget that this is all happening in a year of the pandemic. If you go to Page 6 of this presentation, you should see that our data-driven Autobahn to Cure is truly global. Evotec is the best possible innovation hub for new technologies, better precision medicines and better global access for more efficient and more precise drugs of the future. Page 7 is the point where I want to raise the question to you, why should you not be very comfortable with our current strategy? There is no reason not to be comfortable with our current strategy. And the main underlying reason to fully believe in what we're doing is our talent that we can attract and that we can retain. It's simply fantastic to see how many great people joined the company and how many great people we have in the company. And with more than 500 top talents now together with us driving on the R&D Autobahn to Cures, it is gaining momentum every day, what we are doing to bring more cures to patients. If you go to Page 8, you'll see that top talent needs top leadership. With very good leaders, we multiply the power of our teams. And in this spirit, we are very happy to show you only here eight fantastic leaders who joined the company and who all take over essential processes that are leveraging the power of leadership, but also the power of teams here in the company. If you go to Page 9 of this presentation, you should see that we are following macro trends that give us a lot of support for the direction where we are sailing. And it is great to have not headwinds but backwinds where we are going. But most importantly for us is to see that from RNA transcriptomics, AI and machine learning technologies up to precision medicines, Evotec is not following the megatrends, we are leading these megatrends. And of course, if you look at the growth rates of these charts, you can imagine where our parcels are going. If you go to Page 10 of this presentation, you remember that about 5 to 10 years ago, we always had the vision to build a multimodality R&D Autobahn. Today, we can say that the best of innovation is happening on an unbiased R&D Autobahn to Cures at Evotec. So it's not only small molecules where we are driving. It is all modalities that we can provide to our partners in an unbiased fashion. With this, if you go to Page 11, you will, in the future, hear data and data and data again from us, but data is irrelevant if you cannot process data. And the beauty of Evotec is that we can collect, generate, understand and translate data into the drug discovery processes better than any other company. And with this, we are fully prepared for the tsunami of omics data, not only to process it, but also to translate it into integrated and more efficient drug discovery than ever before. If you go to Page 12 of this presentation, you should see that our journey to accelerate the path and find new cures is just at the beginning, despite the fact that we are launching a new action plan, Action Plan 2025, today. It is an important step in the direction where we are going, but also here, you can see that we are broadening our scope to become an essential platform and infrastructure for the industry, that's the secret behind Action Plan 2025. And that's why you can already today be certain that this will not be our last action plan in the long-term history of this company. If you go to Page 13, let me remind you of our business model. It is unique, and it is the idea to co-own with our partners and to have skin in the game with our partners. Why is this so important? Because for us, no disease is a commodity. For us, every disease has to be tackled as efficiently as possible. And that's why we want to be as integrated as possible with our partners. Coming to this integration comes from four sources where we generate co-ownership: One is our multimodality innovation platforms; two is our indication-driven pipelines; three is our Just-Evotec Biologics platform; and four, our BRIDGEs and other co-owning vehicles that we have built. With this, let me thank you, and let me hand over to Enno, who will bring you into our financial results of 2020.

Thank you, Werner, and a warm welcome from my side today from Hamburg. I would like to discuss our financial performance for 2020. Let's begin with our consolidated numbers for the year. 2020 marked another significant milestone in Evotec's growth, as we surpassed the €500 million revenue mark for the first time, despite the challenges posed by the global COVID pandemic. The annual numbers for 2020 indicate a solid 12% increase in revenue. I will revisit the specifics and the contributing growth factors later on. Our gross margin was 25%, which is lower than last year, primarily due to the end of the Sanofi subsidy for our Toulouse site and a decreased level of milestone achievements, partially affected by pandemic-related delays, along with a growing proportion of margin-neutral IFRS 15 sales being recognized. Research and development expenses rose by 9% compared to last year, mainly due to enhancements in our multiple platforms and investments in our co-owned pipeline. Selling, general, and administrative expenses increased by 16% as a result of both organic and inorganic growth, including the initial contribution from Just-Evotec Biologics for the first half of 2020, the ramp-up of J.POD 1 in Seattle, the establishment of Evotec GT in Austria, and the integration of the acquired biopark by Sanofi known as BBS in Toulouse. Other operating income remained roughly at last year’s level, consisting mainly of R&D tax credits and Sanofi recharges for ID Lyon. Overall, this development led to a slight increase in the other operating result. Our adjusted EBITDA totaled €106.6 million, aligning well with our guidance for the year, and I will provide further details on the EBITDA development later. The net income for the year was €6.3 million, and in addition to the reduced operating income, consolidated operational losses from our equity portfolio and foreign exchange losses contributed to this decrease compared to the prior year. Turning to the two segments, both continued to experience strong growth. Year-to-date Execute revenues, including intersegment revenues, reached €489 million, up from €420 million in 2019, reflecting a 16% increase. The Execute gross margin for 2020 remained steady at 26%. Adjusted EBITDA for Execute rose to €129.3 million, surpassing last year's adjusted EBITDA of €122.5 million. Innovate revenues year-to-date amounted to €105.7 million, a solid 12% increase over last year, driven by higher base revenues, including increased project revenues and additional long-term partnerships, despite a lower level of milestone achievements than in 2019. Total R&D expenses for Innovate were €69.9 million, a 7% increase from the previous year, while SG&A was slightly higher at €15.5 million. The adjusted EBITDA for Innovate was negative but within our expectations, amounting to minus €22.7 million compared to a small positive of €0.6 million last year, primarily due to the anticipated reduction in milestone achievements in 2020. Looking at the fourth quarter results, we witnessed the positive impact of a robust base business. Q4 2020 numbers reflected a 12% revenue increase, underscoring the strong base business despite very high milestone achievements in the previous year. The gross margin was a strong 26%. R&D expenses grew by 4% to €17.9 million, surpassing last year's investment levels. SG&A expenses decreased by 6% compared to last year due to cost-saving measures and lower travel and training expenses driven by COVID-19, even with additional growth in full-time equivalent employees in that area. An impairment of €3.2 million related to our partnership with Haplogen occurred, as they lost a significant financing partner, jeopardizing the development of underlying projects. The adjusted group EBITDA for Q4 was €29.7 million, effectively remaining consistent with last year's levels despite lower milestone contributions. Regarding the year-on-year revenue development, the increase was entirely driven by a strong base business, reflected in organic growth of an additional €63 million compared to last year. This confirms the high revenue quality stemming from our sustainable repeat business with long-term partners, even with lower milestones than in 2019. Portfolio development included factors from the end of the Sanofi Toulouse payments and the non-comparable first half of 2020 financials for Just and J.POD, as first consolidated in July 2019. Revenue was also negatively affected by a currency impact of €6.8 million due to the weakening U.S. dollar against the euro in the second half of 2020, indicating that overall sales development at constant 2019 FX rates would have been even better, reaching €507.7 million. The EBITDA bridge illustrates that its development was negatively influenced by anticipated portfolio effects, particularly the end of the Sanofi Toulouse subsidy and a negative FX effect from a weaker U.S. dollar in the latter half of 2020. Even after accounting for these factors, Evotec reported organic growth compared to 2019, despite the challenges posed by COVID-19 and lower milestone contributions. In summary, we achieved €106.6 million, staying well within our guidance for 2020. Our non-P&L-related financial KPIs confirm the company’s strong position during these challenging times and have substantially improved. Total liquidity rose to €482 million, enhancing our balance sheet by 24%, while the equity ratio increased to more than 49%. Our net debt position, including IFRS 16, nearly transitioned to a net cash position. Overall, we are in a solid financial position, giving us the confidence to pursue our ambitious business goals in 2021 and providing sufficient capacity to invest in organic and strategic growth. This concludes the financial overview, and I would like to hand over to Cord for more insights from the operational perspective. Thank you. Cord, please take over.

Thank you, Enno, and good morning, and good afternoon to everybody on the call. At Evotec, we believe that the precision medicine megatrend is increasingly driving the pharmaceutical industry. And maybe more importantly, we believe that this trend is still at its very beginning. This is really best illustrated by the fact that we are still living in a world where 90% of all drugs only work in 50% of all patients. The associated costs of these ineffective treatments are enormous. Current estimates are exceeding €350 billion annually. More precise medicines and more precise interventions are the only way to really improve on this. At Evotec, we also believe that we can play a significant role in accelerating precision medicine by integrating and industrializing emerging technologies early on into the drug discovery process. This will allow us to deliver more effective therapeutics to patient populations that will actually benefit from these. For all of these reasons, we have been building what we believe will be the precision medicine platform of the future. This platform is shown on Page 22. It has a number of essential components which have to be brought together in order to have maximal impact. A very important component is molecular patient databases. These databases are fundamental requirements to understand the molecular mechanisms of disease, and thus, lay the foundation for precision medicine approaches or early validation of any novel target-driven approach. Connecting molecular patient profiles with clinical metadata redefines health and disease on the basis of molecular profiles rather than symptoms. Secondly, we have built an industry-leading iPSC-based drug screening platform, which can model diseases in many different cell types and even more diseases. Patient-derived cell-based assays are crucial to more accurately model disease than it is currently possible in rodent cells or rodent models. That's why iPSC-based assays have become the new gold standard to profile drug candidates in the preclinic. Furthermore, we have built a proprietary multi-omics data generation platform called PanOmics. It is industry-leading when it comes to throughput, robustness and cost efficiency. This is in particular true for our transcriptomics and proteomics platforms, which are probably more important for most precision medicine approaches than genome sequencing data. Moreover, we have built an artificial intelligence and machine learning-supported omics data analysis platform, which is called PanHunter. PanHunter can facilitate the analysis of big omics data sets which ultimately measure the severity of disease as well as the treatment effects more accurately than ever before. PanOmics and PanHunter together are uniquely suited to support omics-driven precision medicine approaches throughout the whole drug discovery and development value chain all the way through to the clinic and the market. Finally, a better understanding of these disease mechanisms reveals the most disease-relevant intervention points or molecular targets for development of novel first-in-class therapies. Due to the fact that Evotec has built up a multimodality platform, we can always go after the most disease-relevant targets with the most suitable modality. This could be a traditional small molecule, an antibody, bifunctional biologics or bifunctional tumor molecules, antisense or even gene or cell therapy approaches. We believe that Evotec is one of very few companies, if not the only one, that has assembled such a platform to the extent under one roof. There are, of course, other companies that have individual components, but the integration of these platforms into one seamless precision medicine platform is essential to develop its full strength and impact. This is really unique to Evotec and positions Evotec as the drug discovery partner of choice in the industry. On the next page, Page 23, let's briefly review the progress we have made within Evotec Innovate on our co-owned pipeline. 2020 was clearly affected by the corona pandemic, which not only delayed clinical trials but also affected discovery efforts and ultimately milestone achievements. Despite these significant headwinds, Evotec Innovate posted a revenue growth of 12%, surpassing the €100 million mark for the first time in its history. And as this growth in 2020 comes on top of about 40% growth in 2019, we consider this yet another great year for Evotec Innovate. On top of continuously building future commercial upside for Evotec, Evotec Innovate contributed yet again significantly to the overall business growth. Most importantly, Evotec Innovate's co-owned product pipeline continues to grow and advance. What is particularly noteworthy is the fact that despite the headwinds from corona, we achieved quite a lot of progress when it comes to the development of our clinical stage pipeline. As you can see on this slide, our Eliapixant franchise continues to advance and expand. Eliapixant, which we are developing together with our partner, Bayer, is currently in Phase IIb clinical trials in chronic cough as well as in Phase II studies for overactive bladder, neuropathic pain and endometriosis. All of these indications are characterized by numerous unmet medical needs and thus have significant market potential. Beyond the progress with Eliapixant, we initiated a Phase I clinical trial for chikungunya virus using our antibody EVT894, which we are currently developing with support from the National Institute of Allergy and Infectious Diseases, which is part of the NIH. Looking forward, we do expect further advancement in the growth of our clinical stage pipeline from various programs, such as, for example, from our mTORC project with Boehringer Ingelheim and our B1 antagonist program with Bayer. Both are expected to enter Phase II clinical trials in oncology and gynecology, respectively, in 2021. Furthermore, we are expecting various projects to enter clinical Phase I studies. We are particularly excited about the first program of our BMS neuro line, which is expected to enter Phase I studies this summer, early fall. Finally, we are expecting that our co-owned oncology project with Exscientia as well as our immuno-oncology project with Sanofi will also enter the clinic this year. So overall, as our clinical stage pipeline is not only progressing, but it's also broadening significantly. Another aspect of the pipeline that we really discussed is the preclinical discovery stage portion, which on this slide is really not adequately represented. In order to get a better feel for what our preclinical discovery stage pipeline looks like, we tried to show the pipeline according to indication areas covering all individual projects in each indication area. And this is shown on the next slide, Page 24. As you can see on this page, Evotec's co-owned and proprietary pipeline continues to grow. In total, this pipeline currently comprises over 200 projects with significant upside for Evotec. Evotec holds significant upside in about 130 projects in total, about 100 projects carry upside through milestones and royalty-bearing partnerships, which are fully funded by our partners, and an additional 60 projects hold upside through equity participations or spin-out companies that Evotec co-owns. In addition, Evotec Innovate currently fully owns 40 projects that are supported through R&D investments, and which are expected to prime the next generation of industry partnerships. What you can also see on this slide is that Evotec is particularly active in neuroscience, oncology, metabolic disease, and associated complications such as kidney diseases, as well as in immunology and inflammation, including women's health and infectious diseases. This pipeline in each and every area is very strong and probably belongs to the strongest pipelines in the industry. This is especially true for neuroscience, oncology, immunology, inflammation, and infectious diseases, where each and every pipeline consists of more than 40, and in some cases, over 50 projects. It is especially the early-stage pipeline which gives a glimpse of the future. We are confident that these extensive pipelines will continue to deliver development candidates, which will then end up in the preclinical development and ultimately in our clinical stage pipeline. Now that we have looked at asset-driven value creation and product-related upside for Evotec, we also want to briefly discuss platform-driven value creation and the upside we generate purely based on innovative platforms. As you can see on Page 25, Evotec Innovate continues to make significant investments in drug discovery platforms. Most of these investments support the precision medicine platform I talked about earlier. And here, you can see that each of the major components of this platform, like, for example, molecular patient databases, iPSC, PanOmics, PanHunter, as well as multimodality, actually consist of various smaller puzzle pieces, which we continuously strengthen and improve through our investments. I won't go through all of these but really just want to mention two examples, which were the basis of our most recent Innovate deals. First of all, we continuously keep investing in our molecular patient database by adding more and more patient cohorts, not just in the field of chronic kidney diseases, but also beyond. Another example is the establishment of a platform that enables the targeting of RNA via small molecules, which essentially further expands the reach of our small molecule platforms into a space that is largely considered to be the undruggable genome. These platforms are value-generating, not only in terms of genuinely improving our ability to run drug discovery programs and improve their likelihood of success, but they are also directly linked to new partnerships that carry significant commercial upside for Evotec. Since the beginning of the year, we have signed two Innovate deals which carry significant milestone and royalty upside. One with a leading U.S.-based biotech company called Chinook Therapeutics, based on the molecular patient databases; and the other deal was signed with Takeda based on our small molecule RNA-targeting platform. The Chinook deal is really the fourth deal involving our molecular patient database, as you can see on the next slide. Our first deal in chronic kidney diseases was signed with Bayer in 2016. Here, the patient molecular database was not the only component driving the deal, but it did play an important role. In 2019, we signed a second deal in chronic kidney diseases with Vifor Pharma, where we, together with Vifor, established a joint venture, which was fully financed by Vifor, and Evotec still maintained a 50% co-ownership in all projects. At the end of last year, we signed a deal with Novo focused more on diabetic kidney diseases involving an upfront payment, significant research funding as well as significant milestones and tiered royalties. Our latest deal we signed in Q1 of this year with Chinook, a clinical-stage kidney disease company, and this deal is also based on our molecular patient database, but this time focused on certain rare kidney diseases. Also here, we received an upfront payment as well as research funding and significant milestone and royalties, which are on par with our Novo deal. Another example of platforms driving upside deals with significant milestone and royalty upside is our most recent deal with Takeda. This is shown on Page 27. Evotec has established and validated a small molecule platform that allows the targeting of RNA molecules, which is particularly attractive for targets that cannot be addressed by more traditional means. The platform covers the identification of suitable RNA tertiary structures, which can be targeted by small molecules and then the identification of suitable RNA binders, confirming their selectivity and target engagement. Within this collaboration, Takeda and Evotec intend to pursue a number of targets in various indications. And in addition to research funding, Evotec will receive very significant milestone payments up to $160 million per project as well as tiered royalties. With this, I am at the end of my part of the presentation. Once again, 2020 was yet another strong year for Evotec Innovate, and we already had a great start into 2021. Thank you for your attention. And with this, I would like to hand over to Craig.

Thanks, Cord, and good afternoon to everyone on the call. On Page 28, 2020 was an extraordinary year in many respects. So it's a real pleasure to share with you some of the key highlights and achievements of the year, and perhaps more importantly, some of the key steps we took despite the pandemic to put ourselves in the best position for continued and further growth in 2021 and beyond. For some years, we've been recognized as industry leaders in highly integrated seamless working between scientific disciplines. We've now extended this to integrated R&D such that the traditional development considerations, such as biomarkers, human PK, translational biology, clinical planning, safety assessment, manufacturability and so on, are all taken into consideration during the iterative stages of design and discovery. We believe this high-value offering has strongly contributed to our continued growth of base business, with a 16% increase in revenues in this segment, through the addition of new partners and extensions and expansions of existing relationships. Feedback is excellent. Our return rate of business is very high, around 90%. And inspired by these indicators of confidence, we made various commitments during 2020 to increase our capacity for further high-value businesses on our existing sites, thus creating operationally efficient expansion space all over the group, particularly in the U.K., France, and Germany. I'm particularly proud and excited about the development of Just-Evotec Biologics. The founding and original concept of Just was to create a disruptively agile, flexible, and transformationally cost-effective method of biologics discovery, development, and manufacture. Very few of us realized how prescient this would be in 2020. Consequently, Just-Evotec Biologics had a very good feel for its first year in terms of scientific development, such as with the development and publication of J.HAL, a unique AI-designed antibody library, as well as strong new business acquisition. The first J.POD or facility of the future is on track for opening in the second half of this year. And we're very pleased today to announce that now is the time for us to begin the construction of the second J.POD, this time in Europe. On Page 29, I asked the question, why is now the right time? Well, global demand for flexible biologics capacity continues to grow rapidly, and we already see this in the demand pipeline for J.POD 1. Europe represents the second largest biologics market after the U.S.A., and the pandemic has heightened awareness for the need for local supply and supply chain security. Lastly, following the acquisition of the Toulouse site in 2020, we have the operational synergies and efficiencies as well as the space to place this important strategic expansion in Toulouse, France, subject to local environmental, planning approvals, and support. This is the next logical step in the long-term construction of a network of biologics facilities of the future, and more information will follow in the coming weeks on this very exciting development. Page 30, I highlight that the J.PODs are the ultimate physical representation of the transformation of biologics discovery and development continuum. If you like, the end of the pipe result of using cutting-edge predictive science, AI, machine learning, and J.DESIGN capability to drive dramatic improvements in quality, speed, and cost-effectiveness of the entire value chain. Full integration and exploitation of this concept were in the founding DNA of Just and has also been at the heart of Evotec's values for many years. Therefore, Page 31, we have extended the holistic concept of comprehensive predictive science, computational tools, including AI and machine learning, to the fully integrated value stream of the small molecule inventive process, from selecting the right molecule and modality through iterative optimization and development readiness prediction. The unique combination of cutting-edge computational tools and power, available data and models, knowledge, expertise, and full integration of all of the highest caliber technologies to generate new insightful data, puts Evotec in a unique position to transform and disrupt the integrated R&D paradigm, the innovation hub. On Page 32, we show that this comprehensive and unique offering resonates with our partners very strongly and is the basis for our continued double-digit growth of base business. Whether it's expressed in the attraction of new partners or the expansion and retention of existing relationships, we're witnessing ongoing and productive growth in all indicators. Not shown here, but also clear to us is that the long-term value of deals accessible to us is also going up due to the recognition of our unique combination of disease know-how, expertise, full suite technology, and predictive power. We expect these aspects will continue to drive success and growth in the year ahead and contribute to the co-owned EVOroyalty pipeline expansion in the long run. And with this, thank you very much from me, and I hand back to Werner.

Thank you very much. With this, we go forward to Page 34. Here, you will see our ESG and sustainability report in a picture. And what you should notice is that for us, terms like ESG and sustainability are no longer buzzwords that we have to mention on calls like this; it is for us a daily fully appreciated and lived reality. We are convinced about the fact that we are not only on this planet to save and improve the lives of patients, but also to reduce our footprint. And with this from 3 to 4 years ago, where we have been nowhere in our ESG reporting, but also in our awareness of the footprint that we can make as a company, we made a step function to lead this field of ESG reporting and also to lead this field of ESG awareness. Special thanks here to Volker, who did a lot of work in making us here a leader in the future. When it comes to Page 35 of this presentation, you should see our outlook. And what is important about our outlook is that we are building a long-term franchise and a long-term vision for this company. With this, to not only look at one year to come, but look at the overall row that you see here. Nevertheless, 2021 will be great. We expect group revenues to grow in a range of €550 million to €570 million. This would, at unchanged exchange rates, compare to €565 million to €585 million. This assumption is based on the current orders at hand, foreseeable new contracts, and the extension of contracts as well as prospective milestones that we are expecting this year. Evotec expects the adjusted EBITDA to grow to €105 million to €120 million. At unchanged exchange rates in 2020, this would represent a growth to around €115 million to €130 million. This projection takes into account the increasing expenses from promising R&D projects and the ramp-up of the J.POD 1 and also now, and that's news of today, including also some costs for J.POD 2. And you will also see that in our R&D expenses that we are growing substantially, and here, our guidance is between €50 million and €60 million in '21. When you look at the company of today, on Page 36, you do not only see a strong platform, you also see strong numbers bringing us forward. If you go to Page 37 of this presentation, you should appreciate the fact that we have started the year with very substantial transactions. And this is just the beginning because we have not even closed Q1. So you will see way more to come this year because we are accelerating our pace on the R&D-driven Autobahn to Cure. If you go to Page 38, let me invite you to continue to follow us, and it is important for us that you feel the vroooom, which is behind the data-driven Autobahn to Cures because it is you who ultimately go this path together with us. And with this, let me, for Page 39, also invite you to our next upcoming Capital Markets Day, which will be held on the 20th of April, and where we want to give you an update on more details of Action Plan 2022 and some exciting news of our platforms. With this, let me thank the company, let me thank my team, and let me thank you and invite you to questions.

First question is from Joseph Hedden of Rx Securities.

Congratulations on the strong 2020 results. Could you provide guidance on the long-term expectations for your gross margin as the revenue mix changes, particularly with J.POD launching in the first half and the addition of a second European facility? Additionally, what are the 2021 and 2022 capital expenditure expectations now that you are planning J.POD in Europe? Is there any financial support from external sources, such as European governments, that is aiding this initiative?

Thanks, Joseph. On the third question, we are in very intense and very good discussions with multiple organizations at this stage to fully appreciate the disruptive power of this technology and also our intention to that, but we cannot comment in detail. But clearly, there will be support. I can already say this, yes. And on the second question, I'll hand back to Enno. But on the first question, let me tell you that what you see as gross margin today is, of course, if you look at the overall company, always volatile depending on how many milestones we achieve. But when you look at the overall gross margin for our base business and given the increasing revenue mix and the better revenue mix of the company, you will see gross margins improving going forward, especially also with the business lines that we have opened and are opening because they typically have even better gross margins than our historical business. And on the CapEx question, I hand over to Enno.

Yes. Thank you. Pleasure having you on the call, Joseph. So CapEx for 2021 basically will be twofold again. So we will have normal CapEx, which is growing. Just maybe as a brief reminder, in 2020, we had total CapEx around €100 million, €99 million to be precise. This year or 2021, we will see CapEx of roughly €40 million to €45 million in the range of the normal capex for the expansion and growth of the organization. And then we will have ordinary CapEx in terms of a second stage of expanding the J.POD in the U.S., finalizing it, and other expansions at the other side, which should be in the range of €75 million to €85 million in total.

The next question is by Falko Friedrichs of Deutsche Bank.

I have three questions, please. The first one would be on your diabetes beta cell project. Could you update us on your plan here over the next few months and the timelines for that project to the extent possible? Then secondly, on J.POD, could you update us on the go-live timelines for J.POD 1, when we can expect that to happen? And then on J.POD 2, when could this site be operational if you start setting it up now? And do you already have committed customer interest for that European facility? Or do you build it first and then try to acquire business? And then my third question is on your guidance. So when I look at your 2021 guidance, it implies fairly similar growth for revenue and adjusted EBITDA in constant currencies. Now in light of your ongoing expansion and investments, is that a pattern that we should expect for 2022 as well, so not too much operating leverage next year as well in light of these investments?

Thank you, Falko. It's great to hear from you again. It has been a while, and I hope to see you and everyone else on this call again soon. Regarding the guidance you mentioned, this should not be viewed as a pattern. It clearly reflects our current situation, but you should expect to see more activity in our business moving forward, as is evident. Just looking at Q4, you can see signs of that momentum. To address your first question briefly, we are fully dedicated to our beta cell and all cell initiatives on our platform right now. CureBeta is a significant project we are advancing, exploring multiple paths at various levels of innovation, particularly concerning devices and other treatment components. We aim to lead the industry in this respect. We are pleased that we possess all the necessary resources to advance this project on our platform. Additionally, we are considering company formations and partnerships related to our cell therapy initiatives, which will guide us throughout 2021. Everything is progressing rapidly since we have what we need on our platform or through licensing from partners, especially regarding device exploration. J.POD 2 will be fully operational in the second half of 2021. J.POD 1 will also remain operational this year, and it’s impressive what our teams are accomplishing in preparation, especially with the challenges posed by construction on the West Coast in Redmond. It's wonderful that our partners trust us with their compounds even before the facility is fully operational. This is a strong testament to the quality and track record of our team. Despite currently having no customers, as yesterday was the first announcement of building J.POD 2 in Europe, we anticipate attracting many customers soon. To illustrate this further, it's important to note that Evotec has developed specialized expertise in therapeutic antibodies, particularly in the context of COVID, making our Redmond facility highly sought after, though that represents just one source of demand. J.POD 2 is also being built to address needs in infectious diseases and COVID-related fields, as we are convinced that therapeutic antibodies will be a long-term focus in the industry. J.POD 2 may also contribute significantly to the limited manufacturing capacity for cell and potentially gene therapies in the industry. Once we fully initiate the build-out, those will be the directions we pursue. I hope that answers your questions. Thank you, Falko.

The next question is by Charles Weston of RBC.

I'll start with three questions. First, can you provide some insight into the progress of Exscientia? Specifically, after its recent fundraising, how does that impact your balance sheet and ownership value? My second question is broader: how do you approach managing your EBITDA progression? It's clear that the Execute side is experiencing strong growth and stable margins, and you have chosen to reinvest some of that cash into R&D. Some investors may prefer more EBITDA progression while others may favor more R&D investment. Can you share your thoughts on how you plan to balance this moving forward over the next three years, particularly regarding how much you allow to flow through? Lastly, could you provide a range for the milestone payments you expect to receive this year?

So Charles, thanks for the questions. The first question will go to Enno. The second question is a very simple answer because we are building a long-term value company. And with this, the short-term optimization of EBITDA would just not be the right service to our investors. With this, we are investing into disruptive platforms, for example, HAL is a machine learning platform in antibodies when these technologies are ripe to be progressed forward or we are bringing PanHunter and PanOmics to the market when they are needed in the industry. So there is no, I would say, at this stage, tailoring of our EBITDA, for example, that we are handling around €100 million or whatever; it is a function of what is needed to make this company long-term successful. It's, of course, fantastic that we are discussing this, not on a 'closely breakeven situation.' We are discussing this on a highly cash-generating platform. We are discussing this on a highly profitable company. We are discussing this on a company that has spent more money in R&D than ever before in 2020 and will spend more money in R&D in '21 because of this full commitment to our long-term plans. And that's really the answer to our investors who are fully supporting this, when you look at, for example, the endorsement of Novo or Mubadala to build this long-term vision of a company that is profitable, but also invests in disruptive platforms. Sorry for the long answer, but it really goes to the heart of what we are building, and it's clearly not short-term. It is very long-term. And when it comes to the guidance range of milestones, I think you should see a year with more milestones than last year. That's the guidance I can give you. At the other side, you should see milestones are defining our business. Milestones are volatile, will continue to be volatile and really should be seen as something where there's massive upside in the company every year. But even if they would not come, this company would have a very strong year also from its EBITDA perspective. I think that's the beauty of that. And on the Exscientia question, how we deal with this situation in general, I'll give over to Enno; but let me first mention that at this stage, we have more than 20 fantastic co-owning companies and not only one company, which is, of course, especially great because it was one of our first investments, that's Exscientia.

Pleasure to take over. We have seen the recent financing rounds, which so far do not change our accounting here significantly in that regard because we try to only account if profits are really recognized or realized at the end of the day. So there's no significant change in that regard right now.

So can I just ask a quick clarification then? What is the value you're holding in Exscientia now versus what it was before the recent fundraise?

So we have the balance sheet value, so to say, which is around or above €20 million.

But of course, if you have seen the latest round, you can imagine that there is some side in there.

Right. I mean, to be more precise, we have different effects here. On the one hand side, obviously, we have the core balance sheet value. But as we recognize this as equity, obviously, the losses also go into this consideration, which cumulate over the time.

Understood. Sorry, just what is the post-money value of Exscientia? And how much do you own?

We own, of Exscientia, about 19% at this stage, but we are not allowed to disclose post-money valuations of this company, like we are also not allowed to disclose any post-money valuation of any other company that we own.

Next question is by Naresh Chouhan of Intrinsic Health.

On Just-Bio, when we spoke last year, I think you sold about 50% of the capacity, and that was with just two trains. Can you provide an update on whether you now have six trains operational? I believe that was the capacity you could fit into the Seattle plant. If so, how much of that capacity has already been sold, or how much of the operational capacity has been sold moving forward? Additionally, regarding Just, WuXi recently stated they can deliver biologic products for customers at $80 per gram using a 12,000-liter bioreactor. They are increasingly able to produce at lower costs, even though not at the smaller scales that Just operates, but still at relatively smaller scales. Can you clarify where you stand on the cost curve on a program basis to help us understand your differentiation from other players in the industry? Also, regarding the Takeda RNA deal, is it exclusive, or are you able to collaborate with other companies on RNA discovery? If it is exclusive, should we expect much larger mass doses than those we've observed with, for instance, Bayer, given the additional value you are providing?

Let me now turn it over to Cord to discuss the Takeda deal. After that, Craig will provide additional insights on capacity and the development of Just. However, before I pass it to them, I want to emphasize that we do not intend to compete with or be compared to capacity-focused companies in biologics. Our focus is on access in precision medicine. It's like comparing apples to oranges. Now, I'll hand it over to Craig, and first, we'll hear from Cord on the Takeda deal.

Yes. So thank you very much for the question. And the very simple answer is it's clearly not an exclusive deal for Takeda. Actually, on all of these platforms that I mentioned, we only give exclusivity away on targets where we create upside basically to our co-owned pipeline. So it's only exclusive for the specific target that we jointly progress, ultimately. I mean, we're very confident that you'll see other examples of deals here in this space on small-molecule RNA targeting in the future.

Thanks, Cord. Regarding the trains and capacity, I want to clarify that while our entire J.POD building in Seattle and our facilities for the second plant can handle up to six trains, the initial phase is focused on building out the first two trains based on our commitments and capital expenditure requirements. This approach allows for flexible capacity expansion as demand increases. Currently, the two trains at J.POD 1 are nearly fully booked, reaching about 90% capacity well into 2022, which boosts our confidence in our pipeline, deal flow, and overall capacity utilization. When necessary, we can quickly add more trains. To expand on Werner's points about cost per gram and volumetric production, the integrated design of Just is that the J.POD results from extensive process improvements that enhance grams per liter per day through continuous bioprocessing. This innovation significantly speeds up setup times and production scales, offering a valuable and much-needed solution in the market.

I apologize for not providing accurate information on the per gram costing at this moment, but it wouldn't be appropriate for me to guide you in that direction right now.

The next question is by Victoria English of MedNous.

I have three broad questions. The first is about the partnered pipeline. Werner, could you explain what happens when a partnered product reaches a pivotal stage? Do you decide then whether to exit and take your profit, or do you wait for it to go to market? What is the strategy? My second question relates to the distinction between symptomatic and molecular profiling. I’m concerned about the idea that one can identify the cause of a disease mechanically or biologically without engaging with the patient, which is what I typically associate with symptomatic approaches. Is there a way to incorporate real-world data into your model for molecular profiling? Lastly, my third question is regarding the precision medicine platform. Do we truly understand enough about disease resistance to be sure about what targets to pursue?

So fantastic questions. Thank you so much, Victoria. Questions two and three will go to Cord. But unfortunately, he will have to be brief because this will take a full lecture. But the simple answer on your first question is, I think, briefly given because the strategy of the company is to build the largest or one of the largest royalty ever. So with this, we want to be part of the journey of a drug, but we typically do not sponsor clinical trials and we do not run clinical trials. We don't have the capacity for that. So that's why for us, the pivotal point is to hand over drugs latest once the running of clinical costs of clinical trials would have to be financed to our partners and then keep our ultimately royalty shares in these projects. That's also why we can leverage this platform not only with one partner but with multiple partners in the industry. That's why we are building, so to say, this co-owned pipeline out there. And that's hopefully answering your first question. And to questions two and three, back to Cord.

Thank you for your questions. I'll keep this brief. The symptoms and how the patient feels are important in the diagnosis process. However, conditions like dementia can stem from various causes, including inflammation and infections. Ultimately, molecular profiles will determine the underlying causes in different cell types related to the disease. Understanding these molecular changes is essential for precise intervention. The platform we are developing redefines diseases based on molecular profiles in individual tissues and cell types to identify targeted intervention points. For instance, if someone has a headache, it's crucial to determine the underlying cause. Symptoms are merely indicators. The same applies to conditions like muscle wasting, where many molecular causes may exist. Identifying the specific molecular cause is vital for effective intervention. The issue of resistance goes even deeper into the molecular level. To effectively target resistance, it's essential to understand the disease at a molecular level, as well as to identify the changes that occur during disease progression that lead to resistance against a specific drug type. This requires not only examining cellular levels but also understanding alterations at the protein level, such as whether the protein targeted by the drug has changed or is no longer expressed, or if it interacts differently. This necessitates a deeper understanding of the intricate molecular mechanisms, including protein, RNA, and DNA levels, in order to identify the right intervention points.

Thank you very much. I have to cut short a little bit for time reasons only, but I'm more than happy to facilitate a deeper discussion here, Victoria, if you want to go deeper. And with this, I'm asking for the audience, if there is another question in the room because we could take one more.

The next question is by Mohamad Vaseghi of Frankfurt Main Research.

I wanted to clarify my question regarding small molecules for RNA targeting. Specifically, where does Evotec aim to go with this? In which indications?

I think that goes to Cord and is a very good and broad question.

Thank you for the question. Evotec is making significant investments across various areas. In these areas, we're focusing on utilizing patient data and assay systems to uncover molecular mechanisms related to disease processes. This approach helps us identify potential targets, some of which can be addressed with small molecules or antibodies, while others may not be amenable to these traditional methods. In such instances where conventional targeting proves challenging, we turn to small RNA targeting platforms, which allow us to pursue what were previously considered undruggable targets. We apply this strategy in areas where traditional methods are ineffective but where we still have tools to target the most relevant disease mechanisms in specific contexts.

Thank you. If there is no further question on the line, I would...

There's another question by Christian Ehmann of Warburg Research.

Just a quick one. Regarding the BMS project, I'd like to confirm that it originated from your iPSC pipeline, am I correct? If so, does this rapid development reflect the overall progression you expect to see through the clinical and preclinical stages?

So thanks for the question. When you talk about our BMS partnership, I think it is worth mentioning that we have multiple BMS partnerships. The one that you're referring to is our iPSC partnership in neurodegeneration. But at the same time, many people don't have this that much on the radar. There is a massive collaboration in protein degradation in oncology together with BMS. There are multiple other partnerships with BMS that we are currently running and bringing forward. So it's really an area where we have more than five large alliances ongoing with BMS at this stage. In the iPSC-driven neurodegeneration pipeline that you are referring to, we are very happy that with this partnership now ongoing for more than five years, we are progressing into the clinic this year, as Cord already mentioned. This shows you that from a basically target starting point to the clinic, we did this in an amazing timeline with a degree of novelty, which is fantastic. With this, we can prove that with iPSC-derived targets, we do not only have a discovery concept but also a clinical and with this product pipeline building concept. If you multiply the speed of this first visible concept out of this pipeline, like the iceberg picture tells you, you will see multiple more assets coming out of this partnership into neurodegeneration on iPSC cells. At the same time, you should appreciate that our iPSC platform is not only targeted towards neurodegeneration, but also towards neurodevelopmental diseases, eye diseases, kidney diseases, heart diseases. That's why the platform thought of bringing this into multiple indication areas is just at the beginning of what we are doing with this iPSC platform. To link this also to footprint and what we are doing, we are in the process of evaluating the construction of a lighthouse of iPSC research here in Germany, which would then also give us the capacity to do much more than what we're currently doing in this field.

There's no further question.

Which is on the one hand side a pity, because we love your questions. On the other hand, it's great because we have kept you now long enough on the phone line. We want to thank you. We wish you all the best. We hope to see you being vaccinated soon. It is a great thing to be vaccinated, by the way. And with this, all the best. Bye-bye.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.