Evotec SE Q2 FY2022 Earnings Call

Good day, ladies and gentlemen. And welcome to the Evotec SE Half Year Report 2022 Conference Call. For information, today’s conference is being recorded. And at this time, I’d like to turn the call over to your host today, Dr. Werner Lanthaler. Please go ahead, sir.

Thank you very much and good morning and a great day to everyone. Accelerating precision medicine, that’s the theme of today’s analyst presentation for our first half of 2022. Welcome to this. We have uploaded a presentation and will guide you through this presentation throughout the next couple of minutes. If you go to page number two, you can see that I am here together with my team. I am here with our CFO, Enno Spillner; our CSO, Cord Dohrmann; our COO, Craig Johnstone; and we are very happy to give you a brief update about our recent quarters and also an outlook for the remainder of 2022 and into the longer aspirations of Evotec. Our recently joined new colleague, Matthias Evers, is also on the call and we are very happy that he joined us recently. If you go to page number four of your presentation, you can see that significant new partnerships based on data-driven platforms are accelerating our company. We see strong overall performance and progress in all lanes of the so-called R&D Autobahn to Cures. Actually, it’s fair to say that we see a very strong business inflow. We see a very strong business inflow despite a somewhat challenging funding environment for some of our especially biotech colleagues. And we also can already today see a very strong demand into 2023. So with this, so far, we do not notice any impact from a more compromised funding environment of biotechs. When we look forward, we expect several very important milestones, which allow us to confirm our strong business outlook for the rest of 2022. Page four also highlights some single events that are all supporting our unique business model. Cord will illustrate much more about this in his presentation, and Craig as well, but we are very happy that we were able to strike one of the largest extensions and expansions in targeted protein degradation ever together with our partners at BMS. We see several new integrated discovery INDiGO, CMC, and sample management agreements. We are very happy about our long-term new partners, for example, Almirall in dermatology, Boehringer Ingelheim with our induced pluripotent stem cell, Eli Lilly on our molecular patient database, Janssen targeted protein degradation approach and also Sernova. We made noteworthy progress in many of our collaborations and here we want to highlight our neuroscience collaboration with BMS. We also see that Just-Evotec Biologics, which is still in its buildup phase and initial investment phase is going the right path. You will see in Craig’s presentation that we are very happy with the overall projections here. Our co-owned pipeline is progressing very well and in addition to our amazing platform, we have added cGMP cell therapy manufacturing potential and capacity with the acquisition of Rigenerand, which will in the future be named Evotec Modena. Overall, our co-owning strategy is fully on track, and with this, we are also going down the path of further investing into highly promising companies like we have done, for example, with Sernova. We also have to mention lowlights in the last two quarters, especially strong headwinds from rising energy and material costs, and overall inflation are also something which we cannot ignore and which are impacting our cost base a little bit, but this will not stop us. Another lowlight, of course, was the termination of our P2X3 antagonist by our partner, Bayer. Overall, our profitability going forward will accelerate with more milestones, and here we see very good progress in many partnerships and our profitability will accelerate with more transactions to come where some of them are imminent. If you go to page number five, you can see that we keep the pace and keep our strategic direction. Page five gives you the summary of our financials and shows a slightly refined guidance. We see positive influences from FX that are impacting especially our topline to the positive side, and at the same time, we currently see unavoidable cost burdens that are impacting our EBITDA situation, where it is especially energy costs and costs along the whole supply chain, which we cannot at this stage avoid. But as I said, again, this will not stop us. And of course, also these numbers reflect a major investment project that we started with Just-Evotec Biologics, where we are building the most advanced capacities and capabilities in biologics manufacturing into the future. Craig and Enno will give you more details on this later. With this initial view of the company, let me hand over to Enno, who will give you a more detailed view on our numbers.

Thank you, Werner. I'd like to extend a warm welcome to everyone on the call today. I'll begin with a high-level summary of our consolidated Group numbers. Our six-month 2022 results show a robust 24% increase in revenue, with revenue growth at constant currency rates at 19%. The gross margin stood at 18.8%, down from last year's 20.8%. It's crucial to highlight, as Werner mentioned, that we are in an investment phase with Just-Evotec Biologics. Excluding Just-Evotec Biologics, the total gross margin would have been 27.3%, compared to 24.6% during the same period last year, despite lower contributions from milestones, upfront payments, licenses, and significant inflation. Group R&D expenses were relatively stable at €36.8 million, with unpartnered R&D expenses in Evotec Innovate up by 20%. Our R&D investment in Q2 focused on enhancing our various platforms and accelerating our co-owned pipeline. The SG&A expenses increased by €20 million, or 46%, compared to last year, primarily due to a growing headcount in global functions, higher facility depreciation related to Just J.POD and Biopark Toulouse, and new requirements tied to our U.S. listing. Additionally, M&A expenses deviated significantly due to unexpected consultancy and transaction costs incurred recently. Other operating income and expenses rose by €3.2 million, driven by tax credits and reimbursements from Sanofi. Increased income was largely due to tax credits in Toulouse, France, and newly acquired tax credits in Italy, applicable from June 2021, which were not present in the first half of 2021. Our adjusted EBITDA totaled €33.6 million, aligning with our expectations but slightly below last year's €36.2 million, impacted by shifts in our cost structure related to manufacturing capacity investments in our J.POD in the U.S., high energy and material costs, M&A activities, and SG&A expense growth. The net income also reflects fair value adjustments for our EVOequity investment in Exscientia, resulting in a net loss of €101.2 million for H1 2022, as Exscientia’s share price decreased, leading to a non-cash loss from equity of €97.3 million. Our overall revenue growth of 24% was seen across all business areas. This growth included favorable FX movements, particularly the euro against the U.S. dollar, leading to a constant FX rate year-on-year revenue growth of 19%. The underlying business grew significantly by 26%, reaching €330 million in H1 2022, while milestone, upfront, and royalty payments of €6.8 million were lower than in H1 2021. Just-Evotec Biologics contributed €21.9 million in revenue in the first half of 2022, with the overall biologics business showing a 23% increase compared to the same period last year. The reported gross margin reflects our ongoing investment in precision medicine platforms and building capacity at Just-Evotec Biologics, with costs associated with the ramp-up of J.POD facilities in the U.S. and France. Rising energy prices, increased material costs, and higher logistics costs significantly impacted Q2 2022. I want to emphasize that the total gross margin, excluding Just-Evotec Biologics, would have been 27.3% versus 24.6% in the same period last year—an encouraging increase despite lower milestone contributions and strong inflation. Both segments exhibited solid growth compared to H1 2022. Year-to-date, Execute revenues, including intersegment revenues, soared 26% to €351 million in the first half of 2022, driven by a robust base business that grew by 21%, and even 24% when excluding Just-Evotec Biologics. Execute's EBITDA reached €54.7 million, reflecting positive growth from last year’s €51.9 million. Innovate's revenues for the six months reached €78 million, a remarkable 36% increase compared to last year, due to sustained high demand for precision medicine, highlighted by both expanded existing and new partnerships, as Werner mentioned. Base revenues increased to €17.6 million, driven by a rise in FTEs within BMS collaborations. However, due to ongoing R&D investments, Evotec Innovate's adjusted EBITDA remained negative as expected. In terms of the single quarter, my earlier comments regarding H1 2022 also apply to Q2 2022. Base revenues accelerated further in Q2 compared to Q1 2022 and Q2 2021, across all business lines. So far, we have not noticed any significant impacts from the changing funding environment, reaffirming what Werner described. R&D investments continued to accelerate, with SG&A reflecting dynamic growth while scaling strategic projects and our U.S. listing. The adjusted EBITDA remained stable despite the investments and associated costs. Slide 11 outlines Evotec’s strong non-P&L related financial KPIs. The expansion of the balance sheet mainly resulted from the downward revaluation of Exscientia, which did not affect cash and was offset by a US$200 million upfront payment from BMS. Our equity ratio stands strong at 55.6%, and our liquidity position has grown to €888 million, despite ongoing significant CapEx and respective expenditures. This liquidity will support planned CapEx investments to foster and accelerate growth projects, including J.POD U.S., J.POD Toulouse, and general capacity, technology, and platform expansions. We also aim to continue our EVOequity involvement in both new and existing equity holdings. Finally, trade accounts receivable decreased by €25 million, which helped improve our days sales outstanding figure for Q2 2022 to 59 days, well within our target range of 50 to 60 days. This concludes my financial overview, and now I'll hand it over to Cord. Thank you for your attention.

Thank you, Enno, and good morning, good afternoon to everyone on the call. I'll begin my presentation with a brief overview of our key drug discovery and development platforms. As shown on page 14, these platforms enhance R&D efficiency, support precision medicine, cover all major drug modalities, and include biologics manufacturing. I will start with our R&D efficiency platforms, which are recognized as the most effective and cost-efficient in the industry, encompassing the entire value chain. In addition to enabling cost-effective drug discovery, Evotec has created a suite of precision medicine-focused drug discovery platforms. These include our unique molecular patient database, iPSC-based patient-derived in vitro disease models, and AI and machine learning-powered predictions of drug profiles through our panOmics and panHunter platforms. Regarding drug modalities, we essentially encompass all major types including small molecules, antibodies, gene and cell therapy, antisense, and even exosomes. A specialized component of our drug discovery platform is our Just-Evotec Biologics manufacturing framework, which addresses all aspects of antibody drug discovery from unique AI-driven antibody design to product manufacturing. Our manufacturing platforms, termed J.PODs, utilize a continuous manufacturing process that is unparalleled in the industry. The following two slides will illustrate how these platforms continue to forge valuable partnerships. For instance, slide 15 highlights that we have entered several new extended integrated drug discovery agreements based on our R&D efficiency platforms. A significant recent partnership with Almirall in dermatology not only involves substantial research payments but also presents considerable opportunities in terms of milestones and royalties. Page 16 reflects our progress with our precision medicine platforms. In the first half of 2022 alone, we secured five partnerships, all driven by Evotec's unique precision medicine platforms, offering notable financial potential. The BI deal in ophthalmology, for example, is powered by our iPSC-derived disease models. The collaboration with Lilly in kidney disease is based on our molecular patient database and our capacity to develop relevant cellular models derived from our iPSC platform. Similarly, we expanded our BMS neuro partnership, which is also primarily driven by our iPSC platform, focusing on targeting key disease-causing proteins. The Janssen collaboration in dermatology targets specific cell-surface receptors. Notably, we were able to extend our BMS oncology collaboration using our panOmics and panHunter platforms aimed at targeted protein degradation, which alone resulted in €200 million in upfront payments and a substantial overall financial upside exceeding €5 billion with significant royalties for each program. These precision medicine platforms are performing exceptionally well, and we remain confident in their ability to secure further high-value partnerships in the future. Page 17 shows our ongoing progress with our multimodality platform, specifically our iPSC-based cell therapy platform. Unlike most cell therapy platforms, iPSC technology ensures a continuous and virtually limitless supply for manufacturing cell therapy products. In regenerative cell therapy, insulin-dependent diabetes is one of the most promising indications. It's clear that insulin-dependent diabetics experience inadequate insulin supply, which can be addressed through exogenous insulin injections or human islet transplantation, although the latter is limited in availability. The transplantation of insulin-producing beta cells derived from iPSCs offers a potentially curative treatment since these transplanted cells can replace the lost beta cells in diabetic patients' pancreases. Previous studies indicate that beta cell transplants are highly effective. Currently, the primary challenge is engineering high-quality iPSC-derived human beta cells and arranging them in an optimal device to ensure they access the circulatory system effectively to manage glucose levels. At Evotec, we've shown our ability to produce high-quality iPSC-derived human cells. Through our partnership with Sernova, we have identified the most appropriate device for these cells for transplantation, which boasts promising clinical validation data, making them an ideal partner. Additionally, with our recent acquisition of Rigenerand, we're equipped with a facility for manufacturing these cells for clinical development and market introduction. As depicted on page 18, acquiring Rigenerand allows Evotec to complete its fully integrated cell therapy platform based on iPSCs. Our cell therapy accelerator encompasses everything from manipulating and engineering iPSC cells into suitable cell types to developing processes for scale-up, quality control, and GMP manufacturing. The outlook for Evotec in the cell therapy domain is detailed on the next page, page 19. We continue to invest in iPSC cell therapy. While our beta cell diabetes program is the most advanced, it's not our only focus. We're also pursuing a second program in cardiovascular disease targeting heart failure. In oncology, we're actively building a pipeline centered on iPSC-derived NK cells, macrophages, and T cells. We are also exploring immune modulatory strategies using iPSC-derived mesenchymal stem cells and other cell types. Overall, we believe that iPSC-based cell therapies are very well-positioned to fulfill the promise of next-generation off-the-shelf therapies, following the pathways of current autologous therapies, which often face challenges from complex and typically non-scalable manufacturing processes. I will conclude here and hand over to Craig for more insights into our promising biologics manufacturing business.

Thank you, Cord, and welcome. Hello to everyone on the call for me. Starting on page 20, I’d like to take a few minutes to give you an update on the progress and the ramp-up of Just-Evotec Biologics. Let me start with a very brief reminder about Just. Just was founded on a mission to transform biologics development and today we remain convinced by and we are committed to this ambition more than ever. Just-Evotec Biologics will transform biologics manufacturing and generate more accessible biologics medicines that matter through agile, flexible, cost-effective, and fully integrated discovery, development, and manufacturing with our partners. And this is all enabled by cutting-edge AI and machine learning technologies, and the most advanced continuous bioprocessing capabilities. Deploying the same proprietary technologies across all the geographies to bring manufacturing close to its markets is also a key element of this strategy. On this note, we are delighted to confirm that we expect groundbreaking of the first J.POD in Europe to commence at Evotec Campus Curie in Toulouse next month. Our investment in France alongside the continued expansion and build-out of J.POD Redmond and ongoing investments in further technology developments, all point to a business very much at the initial investment stage and only at the beginning of its really exciting trajectory. This also explains the current short-term negative EBITDA contribution from Just-Evotec Biologics to the Group overall. The mid-term business trajectory is visible in a rapidly expanding sales pipeline, and as an example, we were delighted to announce yesterday the extension of our partnership with Alpine Immune Sciences. This partnership first started in 2020, in which we delivered drug substance using J.DESIGN continuous manufacturing platform for Alpine’s Phase 1 study and anticipated Phase 2 studies of ALPN-303. Under the newly expanded contract, Just-Evotec Biologics will leverage its data-driven technology platform to develop a commercial manufacturing process, with a view to supporting potential commercial manufacturing of ALPN-303. This is both an important step and indeed an indicator of the future since we believe it’s illustrative of the outlook and future development of the Just-Evotec Biologics business. As our partner’s assets progress through later stages of drug discovery and development, continuous biomanufacturing becomes more and more important to support the increase in quantities of material, of course, but also crucially without having to change the process of scale-up in volume. This is achieved, as shown on page 21, through intensification and continuous bioprocessing. This combination allows for greater massive protein per unit reactor volume and greater mass per reactor by extending the number of days from which continuous bioproduction can be achieved. In addition, these advances reduce the traditional risks associated with scale-up of reactor size, as well as allow for more rapid access to larger quantities, as the development phase of the asset progresses. On page 22, we are also pleased to report that our technologically disruptive offering is gaining a lot of momentum with our partners, and the diversity and the mix and the number of partners we now support is increasing, and the mix of partners is very reflective of the rest of Evotec’s partner mix in business, and with projects at various stages of drug discovery and development and across a range of indications. On page 23, we show the number of new deals signed in the first half of 2022 is approximately equal to the number of deals signed in the full year 2021, which implies a doubling of the rate of business acquisition. In addition, the value of these new deals signed is also significantly higher than last year and it should, of course, be appreciated that these deals are usually multiyear durations. So deals signed now, for example, will positively influence future revenues in 2023 and beyond. Therefore, in summary, Just-Evotec Biologics is a paradigm shift to biologics development and manufacture. It’s still in its very early investment stages. We are investing in expanding capacity in the U.S. and Europe. The market response is very positive, business acquisition rate and the value of recently acquired business is rising rapidly, giving a very strong outlook for 2023 and beyond. And with that, I hand back to Werner to describe the co-owning pipeline.

Thank you, Cord. Thank you, Craig. If we go to page 24 of this presentation, let me first remind you, it’s not only a strong base business and a very strong performance business that we are generating from our precision medicine platforms. Ultimately, we are building a large royalty pool. Today, in the future royalty pool, you have more than 150 co-owned assets that are progressing overall very well. Just to highlight a few of the more than 10 significant progression steps that you will see in the next 12 months to 24 months. Let me highlight, for example, our important progression in neuropathic pain together with Bayer. Let me also highlight that we are very happy with our eiF2b activator together with BMS in neurodegeneration. And let me also highlight that there will be a lot of progression from our preclinical pipeline into the clinic, for example, in virology. With this, knowing that a co-own pipeline build takes time, we are very happy with the overall progression that we see here. Page 25 shows you another feature of co-owning what we think are highly attractive assets into the future. Our strategy to co-own companies that create significant value is something that we have continued in the last two quarters, and that we will continue going forward with investments into highly attractive companies like, for example, we have done this into Centauri, into IMIDomics, into Sernova, and also into Aurobac. And if you look at the overall strategy here, it’s of course, something where there will be volatile elements coming into the strategy through better performance or worse performance. But overall, the portfolio and the synergistic effect of this portfolio is very strong. Page 27 highlights a different aspect of what we think is very important. We are not only a company, we are looking at Evotec as part of society and with this evolving as a very important part of society and taking care of society. We keep our promise to take ESG very seriously. Our first commitment on our science-based targets gained traction and we see visibility here. Our commitments on the social front are important and let me highlight again here, for example, that it is the combination of Boehringer Ingelheim, bioMérieux and Evotec making the largest efforts in AMR research and development into the future. This is what ESG is about to create a more sustainable world, and with this being a key player in infectious diseases in AMR is a true commitment that we are making here, and of course, we try to build and live up to the best of governance. When you go forward, let me summarize where we are today by basically saying that we see a very strong business growing. We are especially benefiting from our U.S. contracts at this stage, which allow us to bring our guidance to €715 million to €735 million. At constant FX this would be €690 million to €710 million. We keep our very aspirational R&D commitment at the highest level of the company in its whole history at about €70 million to €80 million. And our adjusted EBITDA, as already mentioned, guidance is at €105 million to €120 million, which translates into €85 million to €100 million at constant FX rates. So despite favorable FX rates, we keep our nominal EBITDA guidance unchanged as unfavorable cost burdens cannot be totally avoided in the company at this stage. Nevertheless, this will not stop us at all, and we see a very bright future ahead of us, which is also highlighted on the next page. With our mid-term goals, where, yes, it might look aspirational to go to an EBITDA level of €300 million, but don’t forget that the Just revenues and the Just profitability is kicking in a bit later. And that’s also why we are highlighting on page 30 a very strong news flow to come for the remainder of the year, but also already into 2023 and 2024 and 2025, because our R&D precision medicine platforms are delivering our integrated efficiency platforms are truly benefiting the industry, and our Just-Evotec Biologics paradigm shift in biologics is ongoing as we speak. And as we want you to be part of that, let me first on the next page thank you for being part of our journey and let me wholeheartedly invite you on the 2nd of November to see and witness this paradigm shift of biologics with an in-person and also virtual Capital Markets Day that we will host out of our Redmond facility in the United States and you will get details with the save the date memo in the coming weeks. But I already want you to now to mark your calendars to see the paradigm shift of biologics, as it starts in Redmond and is then going to lose very soon. With this, let me conclude this initial presentation, let me thank you for following Evotec and let me also thank you for supporting our mission and strategy, and of course, we invite you to questions.

Thank you very much, Doctor. Today’s first question…

I have…

...is coming from…

No. I have the first question, Operator?

Go ahead, Doctor.

So the first question, which came to me from Zoe from RBC, basically is what our current pricing strategy and how are we able to pass on costs currently? It’s actually quite an interesting situation that we do not see a lot of resistance from our partners to also follow us to higher cost and price levels. But what you have to see is passing on costs takes time, especially when the benefit of long-term contracts that we have closed, for example, three years to four years ago, cannot be shifted to immediate price increases. So I think for new contracts, we are very happy here with our alignment in business development, but many of the existing contracts, of course, have to be renewed to new prices, and of course, here all effects are taken, for example, to bring inflation adjustments into account and situations like that. And with this, I hand over to the moderator and ask for the next question.

Thank you very much, Doctor. Today’s first question is coming from James Quigley calling from Morgan Stanley. Please go ahead. Your line is open, sir.

Hi there. Thank you for taking my questions and sorry if this was already addressed in the presentation, but I had some trouble accessing the webcast. First, could Enno discuss the FX guidance, which suggests a 3.5% benefit on sales? The U.S. dollar strengthened by about 12% in the first half compared to the euro, and considering that the U.S. accounted for around 55% of last year's sales and appears similar in the first half, I expected a greater FX tailwind. Is there any offset or timing of revenue recognition that I might not be considering that would justify the FX guidance of about 3.6% or 3.5%? Secondly, regarding the J.PODs, could you provide insight into the investment timeline? You mentioned significant CapEx this year, so by year-end, how many of the six potential lines in J.POD 1 will be operational, and how do you expect this capacity to be utilized over time? I'm trying to understand the gross margin impact in 2023 and how that might evolve through the first and second halves, as well as when that contribution could potentially turn positive. Thank you.

Thank you for your question. Let’s start with the second question on biologics and maybe, Craig, you illustrate this a bit better.

Sure. Currently, we have three trains operating. One train is at the J plant in Seattle, and we've opened two trains in J.POD. We anticipate that these trains will be fully operational this year, and the revenues and sales we are generating will support their operation throughout 2023. The business dynamics are very promising, and we plan to continue investing in J.POD 2 in Toulouse, as well as completing the build-out of J.POD 1 and additional process development space, which is necessary before we can start manufacturing. There will be multiple investments and ongoing expansions throughout 2023, alongside realizing sales from 2022 that will contribute to revenues in 2023. As we look ahead to 2023, I expect that the EBITDA will be significantly less negative compared to 2022 due to business dynamics, the acquisition, and recognizing sales as revenue on our platform, although this will be countered by continued investments and expansions.

Yeah. For quick completion, we, of course, as we speak, plan to implement the three additional trains where we have space in Redmond and are then implementing this capacity for 2023 going forward. Coming back to the first question, this goes to Enno.

Yeah. Great pleasure, James, to answer that. So in principle, I think, your assumption is in the right direction. I mean, in the first half of the year where we already experienced benefits from FX, obviously, the dollar was going up over time, so here we have seen in the beginning of the year higher amounts in particular still in the first quarter, and obviously, for the second half of the year, we are currently in our planning assume the dollar on a relatively high level in the range where it is today going forward.

Excellent. Thank you very much. Looking forward to coming up on developments. Thanks a lot.

Great. So we already have the first guest investment. That’s fantastic. You see we will order already the cokes now. Next question, please.

Thank you. We will now go to Christian Ehmann calling from Warburg Research. Please go ahead.

Hello, everyone. Thank you for taking my questions. I have two for now. Let's begin with Innovate. You've demonstrated a significant increase in revenue from this segment. Can we expect this to be a consistent trend into the second half of 2022, and how do potential milestones from BMS factor into this assessment? My second question pertains to the Department of Defense contract. Could you provide an update on the current situation there? Thank you.

Yeah. So the first question will be taken by Cord. The second question will be taken by Craig. Let’s start with the second question.

Sure. Hi, Christian. Thank you for your question about the Department of Defense. We continue to engage in very active and positive discussions with them. We are currently at advanced stages in talks about our future collaboration, and we look forward to providing you with more details soon.

Thank you. And maybe, Cord, you gave a bit of an insight into your deal pipeline and deal expectations out of the Innovate.

Last year, Innovate had an outstanding year with 50% organic revenue growth. This year, the first half has shown a 36% increase in revenue, which we are very pleased with at this time. As you've noticed from our deal flow, we are satisfied with the progress made in the first half of 2022 and believe we can build on this in the second half. We maintain that 2022 will be another excellent year for Innovate. Regarding milestones, we must reiterate that we do not fully control their delivery since many depend on technical achievements and biological factors. While the milestone contributions in the first half of 2022 were somewhat low, we want to emphasize that we accomplished many milestones at the end of 2021, which are primarily intended for delivery in 2022. Overall, we expect a strong pipeline of potential milestones in the second half of 2022, and regardless of whether these milestones are achieved, we anticipate a very successful year for Innovate overall in 2022.

Thank you very much.

Thank you.

Maybe to add one sentence to the discussion with the DOD, where I think it is important to see that this is especially also a scientific and technical discussion with a very sophisticated team of scientists and experts in process development. So if the DOD is validating a new technology, this is supporting what we are doing on this paradigm shift for biologics and that’s why this is a very important ongoing discussion, as Craig already mentioned. Coming to the next question, please.

Thank you, Doctor. We will now go to Mr. Steven Mah calling from Cowen. Please go ahead.

Hi. Thanks for taking the questions. So some of your peers have reported that there’s been some delays in general hesitancy in pressing forward with R&D projects due to cash conservation reasons, given the macro environment. Can you give us a sense if you are seeing any similar slowdown trends in the core business?

We wanted to highlight in the presentation that we are pleased to report no slowdown in our partners' requests for our offerings at this time. It's important to note that Evotec is not just another interchangeable CRO; we provide solutions that genuinely increase efficiency for our partners. In fact, in some cases, collaborating with Evotec enhances our partners' efficiency, enabling them to deliver more data in shorter timeframes and with higher quality. This addresses the funding challenges faced by many biotech companies, making the current situation favorable as more organizations recognize the technological capabilities we offer. Additionally, we maintain a strong balance of partners, including large pharmaceutical companies whose commitments to R&D continue to grow, as the demand for pipelines is on the rise. We also have solid relationships with mission-driven foundations and academic partners, both of which are relatively unaffected by the current funding climate. Regarding our biotech partners, many are supported by reputable venture capital firms that have long-term investments from funds raised in 2017, 2018, and 2019. These funds are currently active and funding their existing portfolio companies well. Therefore, if the funding environment improves in the next two to three years, we believe we are well-positioned for future success, and we are pleased with our current standing.

Thank you for your patience. I had some trouble joining the call earlier. I have a question about the macro environment and the new partner alliances you’re engaging with. Has this influenced the way new partner deal structures are being assessed? Specifically, are you noticing a decrease in upfront payments and an increase in back-end economics? Could you share some insights on the trends you’re observing in the new partner alliances?

Yeah. I mean when you look at that Evotec has been able to close the largest upfront deal ever in our history with $200 million upfront and a more than $5 billion volume from BMS. I would say we have, at this stage, a very good discussion, situation with our partners who value what we bring to them. That’s the first thing. And the second thing is being cash flow positive and being a profitable company with more than €800 in the bank at this stage allows us to basically go for the optimal deal structures when it comes to upfront versus milestones versus royalties. And here, I think, we are benefiting from the strong balance sheet and the long-term customer relationships that we have. And by the way, we have a new colleague in our team, Matthias Evers, who will now optimize all of this even better than we have done it in the past together with the team that we have.

Okay. Great. Thanks Werner for the color.

Pleasure. Let’s go to the next question and I hope you are also coming to our Redmond Capital Markets Day. That would be great.

Thank you, Doctor. We will now go to Derik de Bruin calling from Bank of America. Please go ahead.

Hi. Good morning. I have two questions. I think one, and once again, I also got on late to the call, so apologies. But can you just talk through the puts and takes on the EBITDA guide relative to your initial forecast for 2022, just to make sure that we understand all the moving parts between FX, inflation, higher investment? And then I have got a follow-up.

Great. Yes. And Enno will take this question.

There are several factors we need to take into account. We already mentioned that we have strong positive influence from foreign exchange factors. However, we are also facing additional expenses across various areas in our profit and loss statement. Like many other companies, we are experiencing rising energy costs, which have increased significantly and are expected to persist for the rest of the year. The same applies to material costs and logistical expenses, which are also rising. In terms of selling, general, and administrative expenses, we see an increase mainly due to the growth of our organization and the scaling efforts we are coordinating. We also have the planned impact from our U.S. listing, which is affecting our SG&A costs in its first year. Additionally, there are expenses related to our recent merger and acquisition activities, including transaction costs and consultancy fees within our SG&A. On the research and development front, we are experiencing an increase in costs, which, while still not very significant overall, is likely to continue into the latter half of the year. These are the main components we are focused on, and the additional costs we are facing essentially counterbalance the favorable effects of foreign exchange on our top line.

And maybe if I may add one, we also have the idea to keep our turnover rate at the company as low as possible to keep our highly qualified personnel. So, with this, also increased cost for personnel has been quite impactful in the first half of the year and we don’t expect this to go away, because of course, all our employees are also facing higher costs in their living situations and that’s also where we invested there. The benefit of that is that we have a very low turnover compared to many of our peers, which allows us to grow long term much better than other companies.

Okay. So that was going to lead on to my question, which was if you start thinking about 2023, how much of those additional costs will carry on until next year?

Yeah. I think one aspect really here is that for 2023, as already mentioned, we so far see a very good understanding of our partners to also accept higher prices. So that’s why…

Yeah.

... I think the cost pressure that we can share with our partners is something that we, at this stage, discussing and where we see a lot of understanding because they all understand the situation. So that’s why I think it’s an interim effect where these long-term contracts that have been locked in, we were not able to change and where new contracts we will be able to really adopt this cost situation quite nicely, of course, other costs that you are increasing now will not go away. We also don’t expect energy costs despite the fact that they will go down to go down to the levels where they have been before. We also don’t expect supply chain costs to go down to the levels where they have been before. And the other thing that you should appreciate, at this stage, we are expanding and with this investing at every site where we are. And also this will not be a situation, which can go away that easily or where costs will go down in 2023. So that’s why there will be some interim effects…

Yeah.

… but not all of it. And I mean with regard to FX, we will have to see at the end of the year what the forecast will be from the different banks and what the estimates are. That’s hard to estimate, as you know, and I mean, last year, we had headwinds from FX and this year it’s a tailwind. So that’s something that we will have to estimate at the end of the year.

Okay. And if I can squeeze in one technical question, when you are looking at monoclonal antibody production using continuous manufacturing, I appreciate that the yields are much higher, but what’s the overall fully loaded cost like per gram on your process versus traditional batch fed for monoclonal antibody?

Yeah. I mean it’s a bit of a wider question. With this, I maybe hand over to Craig.

Thank you, Derik. It's a complex question due to the typical calculation methods. The continuous processes operate at a certain scale over several days, leading to a different perspective on costs. However, we strongly believe that, considering a benchmarked antibody and applying a continuous bioproduction model, we genuinely think a 50% reduction in cost per gram is achievable with a fully operational J.POD running at high capacity.

Thank you.

That’s one part of this and the other thing is, of course, with fully continuous manufacturing and the technologies that we are applying, we are opening markets for biologics, which at this stage, don’t exist because for example, the price is not something that you can show in infectious diseases and biologics. And with this, again, our continuous manufacturing process is not only a question of cost, it’s also a question of how much material do you bring, how effective are you, and which indications can you open there also? For example, areas where cost is so far not allowing biologics to go in or where you can go for combination therapies where for many other technical reasons today you cannot go. So that’s why the range of what fully continuous manufacturing and our process or opening is extremely wide.

Thank you.

Great. Next question, please.

Yes. We will go over to Falko Friedrichs calling from Deutsche Bank. Please go ahead, sir.

Thanks very much. Hello, everyone. Two questions, please. The first one on Just.Bio, just a bit more color on your ability to attract new customers would be helpful and whether there’s a growing pipeline with interested parties for your Redmond facility and also, if you are already seeing the first interest from customers to work with you in your Toulouse facility or if that is still a little bit too early? And then secondly, can you remind us of this agreement behind the partnered R&D portion that you have with Sanofi and how much longer that goes? Thank you.

Yeah. Let’s take the first question first, and maybe Craig, you give an update here on the pipeline, and Enno, then takes the question on ID Lyon.

Thank you for the question. I want to direct your attention to slide 22 in the presentation. We have seen a significant increase in the number of partners we've secured for future business, essentially doubling our partnerships. One reason for this growth is the successful launch of the J.POD just 12 months ago, which previously only existed in concept. The ability for potential partners to visit and experience the facility firsthand, as we invited them to do for Capital Markets Day, has made a substantial difference in their understanding and interest in our approach. The increase in signatures and their value reflects this tangible experience, as visitors can see the team and technology actively functioning. While it's still early for visits to our Toulouse site, we are starting discussions that could lead to preparatory process development before manufacturing. We anticipate conducting this work in Europe during 2023, ahead of opening the new facility in the second half of 2024. I hope that clarifies your question.

Thank you. Second question to Enno.

The income and other operating income relates to our ID Lyon efforts, where we took over the site along with its teams and assets a couple of years ago. In return, Sanofi agreed to cover the local costs as well as certain project costs. This agreement is set to last until about mid-next year, and we have a financing arrangement in place that we plan to utilize between the end of this year and mid-next year, marking when it will conclude. It's important to mention that we are currently transitioning the team working on these efforts into the Execute efforts, ensuring they will be part of our Execute business instead of being categorized as R&D costs.

And I think here to illustrate this, more than 80% of all the costs and all the people in our infectious disease efforts are already on customer projects, as we speak or on long-term R&D projects. So with this and the transition, we are very happy with the progress here, and we don’t expect any negative or major negative impact from this ending.

Perfect. Thank you.

Next question please.

Thank you. We will now go to Joseph Hedden calling from Rx Securities. Please go ahead.

Good afternoon. Thanks for taking my question. It’s just on the acquisition of Rigenerand, just interested in what attracted you to the cell therapy capabilities of this particular company? And then would you expect the capacity that Rigenerand has is going to cover all of your current planned activities in cell therapy or is this more of a clinical stage venture on this side? Thank you.

Yeah. Maybe given the importance of cell therapy and the product and the process link here, it would be great, Cord, if you can describe one more time why we felt so attracted to integrate this.

Currently, there are no companies that can adequately support the development of iPSC-based manufacturing processes that extend from the clinic to the market. This is closely tied to the specific processes being developed for customized cell types and compliant with GMP standards. We were drawn to the site in Verona because it offers a fully integrated facility for cell therapy. They already have a product in the clinic, allowing us to implement our processes there in a flexible and controlled way, with room for future expansion. These factors were decisive in our attraction to this site.

And of course, it’s a fantastic synergy to have an internal pipeline going into this process for clinical use and large clinical use, and opening the site for external partners, which we are doing as we speak and that’s why it was very important, what Cord has shown you on the cell therapy pipeline that we are building here because here we have a true offering to progress on the same platform when our partners are making their diligence visits together with us. With this, next question.

Yeah. Doctor, we only have one question queuing at this time, sir. And we are going to go to Christian Ehmann from Warburg Research. Please go ahead.

Hello, again. I have a question about potential power cuts. We've discussed the risks in Germany, but now the U.K. is planning to potentially cut power to the industry in January next year. Can you give us an idea of your exposure to these types of disruptions? Thanks.

You can imagine that this is a question that is on our risk management portfolio top of the list and that’s why Enno is super qualified to answer that question.

Thank you for your kind remarks, Werner. I'm happy to address your question, Christian. First, we need to assess the different countries and the overall Evotec landscape. Currently, we view Germany and Italy as the countries receiving the most attention from us, while countries like the U.S. seem to be more stable. We aim to evaluate the risks associated with each relevant area. We have measures in place to reduce energy consumption now and in the future, considering the impact on our employees and partners. Another aspect to consider is the alternatives within our group to shift work to other locations, for example, if we have to reduce operations in Germany while maintaining availability in France and the U.K. However, this can only apply to certain parts of our activities. Lastly, it's crucial to ensure that we gain the attention of relevant organizations regarding how Evotec is prioritized concerning energy availability. For instance, during key periods, we had good collaboration with certain authorities in Italy, and we are pursuing similar efforts. However, I must be transparent that we do not have a short-term solution that can completely mitigate this risk from our perspective.

Thank you very much. I hope this answers your question. And I think it highlights that the world of today is a bit more complex when it comes to questions of running a business than it was maybe nine months to 12 months ago. But, overall, it is fantastic to see that the idea of Evotec is stronger than ever, and also with this, the response and the partnerships that we can create are really stronger than ever. And just taking your example of energy, here it makes a huge difference if you, together with your partners, can lobby for a prioritization slot in energy prioritization, for example, in certain countries, which we clearly have started already at the beginning of this discussion and that’s also why we think that we are here in a very good position. With this, if there are no further questions, let me thank you again. Let me thank you for your questions, let me thank you for your notes and let me also invite you to Redmond again. There are already two people coming. So with this, the event is almost full. But we will open a slot for you immediately when you send us a note, and after the save the date note will go out to you. Thank you very much and have a great day.

Thanks very much, Dr. Lanthaler. Ladies and gentlemen, that will conclude today’s conference. We thank you for much of your attendance. You may now disconnect. We wish you a very good day and good-bye.