Evotec SE Q3 FY2022 Earnings Call

Good morning and good afternoon. Welcome to Evotec's Q9 presentation for Together for medicines that matter. We've uploaded the accompanying presentation to our website, and you can follow this call in the coming quarters. On Page 2 of the presentation, you'll see that I'm joined by my team, including our CFO Enno, COO Craig, CSO Cord, and CBO Matthias. Enno and I will present the initial report, and then we look forward to your questions. This call follows our second Capital Markets Day of 2022, which took place last week in Redmond, focusing primarily on Just - Evotec Biologics. We're excited to give you a broader overview of the entire business today, although we will touch upon Just - Evotec Biologics. If you have detailed questions about Just, I recommend checking our website where we've uploaded the webcast of the Capital Markets Day presentation. Thank you for attending and for your insightful questions. Let’s dive into our business, starting with Page 4, where we’ll review the highlights and lowlights from our nine-month report for 2022. We're focused on execution and acceleration, and it's great to see continued demand across all sectors of our business. This is reflected in new and extended discovery and development agreements, along with some smaller, but noteworthy milestones. We’ve made significant strides in neuroscience, especially in our collaboration with BMS, which is key as we recognize CNS as an increasingly important area for the future. Together with BMS, we hold a leading position in the field based on our iPSC platform technologies. Another highlight is Just - Evotec Biologics. Even in its start-up mode, recent collaborations and two contracts from the DOD demonstrate that we represent a technological paradigm shift in Biologics. We look forward not only to completing the J.POD 1 investment but also to starting the construction of J.POD 2 in Toulouse. We have successfully acquired Central Glass Germany, which will enhance our capabilities in Drug Substance and is a logical extension of our value chain in APIs. Our molecular patient databases, referred to as E.MPD, are progressing well, notably through collaboration with the Hannover Medical School on autoimmune diseases. This progress is underpinned by our advanced software, PanHunter, which offers world-leading Omics-driven data analysis and integration, and will be a valuable tool for scientists in the industry. However, we also face challenges, including delays in milestones and a slower revenue recognition process as we scale our Biologics business. Rising energy and material costs, alongside overall inflation, pose additional headwinds. It's important to note that the entire industry is experiencing similar challenges. Moving to Page 5, we want to emphasize the uninterrupted demand across all industry sectors. While many discuss a slowdown in biotech funding and a funding crisis, Evotec stands out as a high-quality organization that offers solutions for companies seeking efficiency through a shift from fixed to variable costs. This explains why our revenues have increased by over 19%. Even when adjusted for foreign exchange effects, our growth remains impressive. Our adjusted EBITDA is seeing slower growth this year, particularly compared to last year, declining by 36%, but we aim to address this in Q4. Just - Evotec Biologics is still in its start-up phase, meaning we must invest before we see increased revenues and profitability, as previously projected. Adjusted EBITDA has also been significantly affected by energy, material, and M&A-related costs, as Enno will detail in the following slides. If we isolate Just - Evotec Biologics from our EBITDA, the numbers remain strong, showing an approximate growth of 14%. We are confirming our overall guidance, expecting top-line growth to fall between €715 million and €735 million, and we will continue to increase R&D investments for sustainable long-term growth. We are committed to ongoing investments in R&D. Lastly, we expect Q4 to deliver significantly, and we will elaborate on this throughout the call. Now, I'll hand it over to Enno to dive deeper into our financial performance.

Yes, it's a pleasure to be here, and I warmly welcome everyone on my behalf as well. Thank you, Werner. Let's begin with a summary of our group consolidated numbers, starting on Page 7. Revenues rose by an impressive 19% to €511 million, despite notably reduced upfront milestones and license payments. With more than 50% of our revenues in USD, we benefited significantly from the strong USD against the Euro, and revenue growth, excluding foreign exchange effects, was 13%. The gross margin for the first nine months of 2022 was 17.9%, down from 23.1% the previous year, largely due to high ramp-up costs associated with the Just - Evotec Biologics business and a low contribution from milestone revenues. Additionally, inflation caused by rising energy prices, increased material costs, and higher logistic expenses significantly impacted our results. Our group R&D expenses remained nearly unchanged at €55.3 million compared to €53.5 million last year. Consequently, unpartnered R&D expenses for Evotec Innovate increased by 19%, while partnered R&D expenses declined. SG&A expenses reached €110 million, a rise of €38.9 million or 55% from the previous year. The main cost drivers were expanding Evotec’s workforce for future growth, the costs associated with our U.S. listing from last year, and consulting fees primarily for preparing our SAP implementation initiated in 2022. Other operating income and expenses grew by €5 million, mainly due to tax credits in France and Italy, along with Sanofi-related R&D recharges. It's important to note that next year, we will only see contributions from Sanofi for ID Lyon in the first half of the year, as this collaboration will end mid-2023. Our adjusted EBITDA totaled €44.6 million, influenced by investments aimed at enhancing the growth and value potential of Just - Evotec Biologics, alongside low contributions from milestones and licenses, further compounded by inflation. We reported a net income of minus €48.5 million for the first nine months of 2022, largely due to share price adjustments in our investment in Exscientia. Exscientia's share price fell from €19.76 at the end of 2021 to $8.21 at the end of Q3, resulting in a non-cash loss from equity totaling €126.7 million. On Page 8, the slide illustrates our continued strong revenue growth of 19% across most business areas. The base business achieved €502.7 million, showing robust growth of 27%. However, milestones, upfront, and royalty payments accounted for only 8.1% of revenues, significantly lower than last year's €36.5 million, which included a €20 million milestone from BMS. Just - Evotec Biologics contributed €27.9 million in revenues for the first nine months of 2022, down from €34.7 million in the same period in 2021. Excluding Just, the group's base revenue growth would have been about 32%. The gross margin, excluding milestones and Just - Evotec Biologics, remained at 26.5% compared to 21.7% in the previous year, indicating a healthy base business moving forward. Total gross margin excluding Just - Evotec Biologics would be 27.3%, in line with last year's 27.2%, despite lower milestone contributions and increased energy costs due to inflation. The bridge on the net side or EBITDA was €44.6 million, down 36% compared to the previous year. While the Just start-up impact was minimal back in 2021, the adjusted EBITDA for 2022, when factoring out the Just J.POD startup impact, would be €84.6 million, reflecting a growth of 14% or €10.6 million compared to the first nine months of 2021. This growth, alongside favorable foreign exchange effects post nine months, indicated a positive contribution of €12.4 million based on last year's exchange rates. Both segments exhibited solid revenue growth compared to the first nine months of the prior year, with year-to-date Execute revenues, including intersegment revenues, climbing by 23% to €526.7 million in the first three quarters. Revenues were driven by a strong base business, which grew by 18% excluding Just - Evotec Biologics. The adjusted EBITDA for the Execute segment was €75.8 million, affected by the ramp-up costs of Biologics, down from €87 million reported in the same timeframe last year. Innovate revenues for year-to-date 2022 reached €122 million, reflecting a significant 20% growth due to sustained demand for precision medicine, evidenced by multiple existing and new partnerships. Higher base revenues of €29.6 million stemmed from increased Full-Time Equivalents in our CMS corporation. However, due to ongoing R&D investments and fewer milestone revenues, the adjusted EBITDA for Evotec Innovate remained negative, as expected. For Q3, my comments for the first nine months also apply to this quarter. Base revenues accelerated compared to Q3 2021 across all business lines. Thus far, we haven't seen significant impacts from changes in the funding environment, as previously mentioned. However, milestones, upfront, and license revenues contributed less than they did during last year's strong Q3, which accounts for the change in gross margin, aside from inflation-driven cost increases. SG&A reflects continued growth dynamics, higher energy costs, and strategic M&A projects. Consequently, the adjusted EBITDA fell to €11 million in Q3 from €33.9 million in last year’s Q3. Excluding Biologics, the adjusted EBITDA would remain at last year's level. Slide 12 outlines Evotec's solid and sustainable non-P&L financial KPIs. The slight expansion of our balance sheet chiefly resulted from the negative revaluation of Exscientia, counterbalanced by the $200 million prepayment from BMS received in May 2022. The equity ratio dipped to a still robust 54.3%. Our liquidity position decreased slightly to €823.7 million, despite considerable capital expenditures and equity investments, but it still reflects a strong financial standing. This robust liquidity will enable us to pursue planned capital investments to support growth projects, including the U.S. J.POD and the J.POD in Toulouse, as well as overall expansion of our capacities, technologies, platforms, and our EVOequity portfolio. With that, I will conclude my financial overview and hand it back to Werner.

Thank you, Enno. If you turn to Page 14 of this presentation, I would like to summarize our key focus areas aimed at accelerating leadership for sustainable long-term growth. We are developing a PanOmics platform to enhance disease understanding and create more precise medicines. We are at the forefront of iPSC-based drug discovery and cell therapies, showcasing the transformative capability of fully continuous manufacturing through Just - Evotec Biologics. This approach relies on a comprehensive shared R&D network that enables us to conduct all necessary experiments for industry advancements across various modalities. On Page 15, you can see how our PanOmics platform is gradually expanding into more disease areas and partnerships. The two new programs identified in our collaboration with BMS in neurodegeneration exemplify our growing access to deeper insights into disease areas, which we aim to leverage in future technological expansions. Expansion is also crucial for our molecular patient databases, as strong databases serve as the foundation for a diverse range of transactions across numerous disease areas. PanHunter will facilitate the integration and analysis of data critical to understanding diseases in all facets of our operations. PanHunter has launched, and while it may take time, our Software as a Service offering will enable us to engage more partners with Evotec's technological strengths. Page 17 emphasizes our ongoing efforts to establish an iPSC-based platform for drug discovery and cell therapies. We are increasingly confident that Evotec will emerge as a global leader in off-the-shelf cell therapy solutions. On Page 18, we express our pride in the development of Just - Evotec Biologics and the establishment of J.POD in Redmond and Toulouse. As outlined on Page 19, we can report that the initial foundation for growth, indicated by partner endorsements and their programs, is beginning to take shape, both in terms of quantity and diversity of disease areas. With three additional programs added in Q3 and a new award from the Department of Defense, Just - Evotec Biologics is gaining traction, as noted on Page 20, where we've already tripled sales compared to 2021. While Q3 was disappointing, with only €6 million in revenues, we anticipate a rebound and believe this will represent the lowest revenue quarter for Just - Evotec Biologics moving forward. I want to reiterate our recent partnership with the Department of Defense, where Evotec secured a second significant award in a competitive landscape. We will announce the size of this award by year-end. Thus, we view 2023 as a pivotal year for Just - Evotec Biologics' growth. On Page 21, it's encouraging to see our ability to deepen existing drug discovery and development partnerships while cross-selling into the development segment of the value chain, particularly in integrated CMC. For instance, our expansion into organic and orphan drug segments is facilitating entry into critical areas for precise medicine. We would also like to emphasize the strong performance of our Cyprotex brand in DMPK/ADME-tox testing, where we lead in safety predictions and ADME-tox services. Moving to Page 22, we recently completed an acquisition in Halle, Germany, which enhances our capacity to service partners from discovery through to market for drug substances. Page 23 illustrates the progress of our Evotec Insight initiative as we build a pipeline where we maintain royalty rights and milestones without assuming the risk of clinical development. Although we lost P2X3 this year, we have over 140 collaborative projects progressing with our partners’ investments. Some of these projects are now nearing approval, confirming the viability of our royalty pool strategy. For example, a COVID-19 project we contributed to will soon enter markets in Korea, and we expect to see milestones from this in the coming quarters. Looking further ahead, the data points indicate a robust growth trajectory for 2023 through 2025, essential for our envisioned royalty pool from Evotec Innovate. On Page 24, we recognize ample opportunities to invest in logistics companies and platforms that leverage our capabilities. We are also pleased with the strides made by our companies, despite volatility in some of our public holdings like Exscientia and Sernova. Our co-owning strategy, ranging from academia to more established firms, is just the initial phase of creating a robust portfolio. Page 26 revisits our commitment to ESG and sustainability, viewing it as a competitive advantage. Our dedication to environmental and social goals bolsters both internal operations and our broader societal impact, specifically in microbial fields. Effective governance enhances our growth potential through process management. On Page 27, I want to reaffirm our guidance for this year. We are on track for revenue growth between €715 million and €735 million. We are also preparing for increased investment in unpartnered R&D for long-term growth and maintaining our adjusted EBITDA targets. However, as noted on Page 28, significant effort will be required to meet our EBITDA goals, and we seek to be transparent about achieving substantial milestones and upfront licenses. Many of these milestones are attainable and will be highlighted, especially in December. We are observing strong momentum in our base business, leading to operational leverage from the completed target import integration, which should increase fourth-quarter EBITDA compared to the second and third quarters. We are optimistic that Just - Evotec Biologics is approaching a turning point that will mitigate the EBITDA impact seen recently. Looking ahead, we are excited about the potential for Evotec's long-term growth. We believe achieving €1 billion in revenues is feasible despite the challenging biotech funding landscape. We are on a superior path compared to many peer companies, and once Just - Evotec Biologics gains traction and milestone contributions increase, we expect adjusted EBITDA to reach around €300 million by 2025. Our strategy to build a substantial royalty pool through our co-owned pipeline is in progress, and we are actively investing in unpartnered R&D as part of our action plan for 2025. In closing, I anticipate a strong flow of news regarding our R&D efficiency and precision medicine platforms, particularly within Just, as we move not only through Q4 but well into 2023, 2024, and 2025. Thank you for your attention, and let’s proceed to your questions regarding this quarter and what lies ahead. Thank you.

The first question is from Zoe Karamanoli with RBC Capital Markets.

My questions are regarding Just - Evotec Biologics. So the number of customers and projects you have signed with Just has increased, but you reported decreased revenue in Q3 compared to Q1 and Q2. So can you help us understand how we should think about the phasing of revenue contribution within Just from your existing projects? And then as a follow-up, you started to have a lot of projects towards the end of Q3. And maybe this revenue has not come through yet. But why would the revenue from the previous projects go down? Are there any factors that influence revenue recognition? And that is then implied that in order to have more recurring revenue streams within Just, the number of customers must increase substantially?

Thank you so much. And with this question, we go to Craig to bring clarity.

Sure. Absolutely. Thanks, Werner. Thanks for the questions, Zoe. You're, of course, right that the revenues have been going down during the quarter, and it looks like a trajectory. But as you also have seen and heard, the amount of sales that we've recognized during the course of 2022 has tremendously increased over 2021. And with quite a long contract duration, then inevitably, it takes some time before the sales land into recognizable revenues during the course of the ensuing 9 to 18 months thereafter the sales closed. So what we see, in fact, is a consequence of the phasing of revenue recognition during the course of this year, where certain lines of work have been completed and the ramp-up of J.POD and manufacturing capacity in Redmond with the opening of the facility, which was only 12 months ago. So what we expect and anticipate is that, as Werner said, Q3 will be the lowest point in that curve, and that we anticipate a very strong Q4 in revenues as a result of the sales from earlier in this year. Obviously, with sales increasing three-fold over last year, even with our revenue recognition path over multiple months and years, we absolutely expect that revenues in Q4 will go up significantly over Q3 to the tune of perhaps three-fold. Does that address the question?

Yes. So you don't think that the number of customers must increase substantially?

Yes, you are correct. We are openly sharing our sales figures because we understand that to meet our revenue goals for Just - Evotec Biologics, we need a significant increase in sales volume. This can be achieved not only by bringing in more customers but also by increasing the value of the contracts we secure. This is the business mix we are aiming for: strong strategic partnerships alongside a higher volume of closed sales.

Maybe if I add before we go to the next question. What is essential for us is the quality mix of our partners where we are from an opportunity perspective. Allowing the best capacity that we have built to go. And that's why we are deliberately going here for a high-quality strategy because this will then show us very high-quality revenues in the future. And I think that will also come through in '23 as well. Maybe we go to the next question, please?

Next question is from the line of Christian Ehmann with Warburg Research.

I'm trying to understand the factors involved in achieving your guidance. You mentioned that a significant increase in earnings is necessary for Q4. What probability do you assign to that? Do you need all the milestones you anticipate to meet your guidance, or would achieving around 60% of them suffice? What are the key factors at play, and is there a risk of not meeting your guidance this fiscal year? My second question is regarding your visibility. What are the lead times with your smaller biotech customers, and how would a general decline in biotech funding impact your revenue? Those are my two questions.

So let me be very clear that biology will decide on whether these milestones come in or not. There are significant ongoing experiments at this stage, which will lead to biology readouts where if these are positive readouts then a milestone will be achieved. If these are negative readouts, then a milestone will not be achieved, or if it's unclear, then a milestone is simply delayed. So it's all in the process. We can only confirm about this at the end of the year when we have clarity on where the experiments are lending. That has always been the case. That's part of our business model, that milestones are part of the EBITDA driving events. So that's how you should look at this. And there are smaller milestones and there are larger milestones; we typically, at the beginning of the year, factor in not all of them being successful. So we have an attrition model behind it, which we don't disclose outside, of course. But what you, at this stage, should see is that it's possible, and that's also why we are confirming guidance, but we also want to highlight that the volatility of experiments we cannot control. When it comes to visibility of biotech funding on our platform. Here, I think for '23, we are on top line growth, very confident because we have a number of our partners with long-term visibility; the average contract time is 18 months. We are very confident that double-digit growth into '23 will be possible from what we see today. And that's also why the mix of pharma partners, biotech partners, and mission-driven foundations is allowing us to really counterbalance if one group is a bit weaker. And, for example, mission-driven foundations have no impact at this stage from funding, and they are even increasing their exposure to Evotec because they're very happy with our deliveries that we bring into, for example, the Huntington Disease Foundation or into the Parkinson's Foundation and other of these groups. With pharma, we even see an increased demand because we are one of the platforms where pharma has, due to the pandemic, learned that organizations like Evotec are continuously delivering. And with biotech, here, we are working with a lot of groups where they still have strong funding situations from their venture funds who raised significant amounts of money in 2019, '20, '21, and where these funds are typically given out over the course of five to six years. So also here, there's a split in biotech funding into the very well-funded companies and those who are struggling. If the year '23 at this time would looked at in isolation, we also don't expect that basic funding will be a major hit for us. If this environment, like it is today, continues throughout the whole '23 and the beginning of '24, then we would also probably see an impact. But then the nice thing about the way we are building the Company is that we can adopt capacities, which we would then do. In any case, we don't do this now because at this stage, we assume quite strong growth. I hope this answers your question.

Next question is from the line of James Quigley with Morgan Stanley.

I've got three, please. So firstly, a quick one, could you give us an idea of the impact from the Sanofi ideally on other operating income that you expected for 2023 for the first half of 2023? Then secondly, the gross margin development for the base business, excluding Just Biologics has been pretty strong. Part of that is FX. But what are the key factors that we need to consider around the margin for the base business as we look into 2023? And sort of how sustainable is this level of gross margin given things like inflation? Part of it is impacted by Milestone, et cetera? And then the third question on Just Biologics. So a follow-up on Zoe's question on revenue recognition and the trajectory. You mentioned in Q3 should be the trough. Q4 could be quite strong. But as we look out further, how should we sort of think about the sort of quarterly progression? Should we think about it being sort of fairly lumpy in line with project milestones, or should we expect it to be fairly smooth in terms of growth from here or any other sort of patterns?

First question goes to Enno. Second question and third question go to Craig.

Okay. Then I come back to the Sanofi ID Lyon question, where we have so far year-to-date, seen roughly €27 million out of the other operating income being derived from that. This kind of goes pretty continuously over the quarter. So it's roughly in the range of €8 million to €10 million per quarter. And then if you assume that for the first two quarters of next year, then I think you should have a good orientation for what the impact is here under other operating income.

Okay. Thanks, Werner. James, in terms of the gross margin, you're absolutely right. I think it's a significant step-up, and that's despite some negative factors, which are already kicking in even now during this year, as you understand, inflation costs, materials, and indeed energy. Looking ahead, we very much expect that our gross margin will be maintained. It's a sustainable increase, and it's an improvement. And that's during a period where the contribution of milestones in 2022 so far has been relatively modest. Behind that, the factors are increasing prices to a certain extent but also operational excellence interventions which we've been concentrating on, as you can imagine, given the current trading conditions. I hope that answers the question about gross margin. And then in terms of Just - Evotec Biologics, one of the things that you've rightly identified is that the revenue recognition is currently a bit lumpy. And a feature of that is when we're in the start-up phase, as we are, then the completion of projects and the volume of projects and the replacement rate of projects leads to a somewhat lumpy characteristic as we've seen earlier on this year. But what we also know from all the rest of our business here is that the bigger the volumes become, the less erratic the revenue recognition becomes. That's a perfect understanding I think from a process point of view, and so looking ahead, based on the sales volume that we've seen in 2021, and we continue to have very positive discussions for further sales, we would expect that the revenue recognition might remain not exactly smooth, but it should smooth out a bit compared to 2021, looking out into 2023.

Maybe Matthias, if you can give a bit of a flavor on Just - Evotec Biologics, how customer segmentation looks into the years to come and also with the contributions to come?

Thank you very much, Werner. To your question, one way to consider this is that we serve various customer segments, as we discussed during the Capital Markets Day. We have observed demand from the biotech sector, particularly in the early clinical trials, which naturally progress from initial clinical supply to later stages and eventually to commercial supply. This creates a relatively smooth demand curve. As we address this narrative, we also expand our customer base. However, it's essential to emphasize that with later-stage and next-generation projects, there may be larger commercial volumes from the outset, which could lead to fluctuations in demand. It can be more challenging to integrate these projects into our pipeline, but it's crucial to recognize that this customer segment is present. We also mentioned, during the CMD, a partnership discussion related to biosimilars that is currently very active and will significantly contribute to our growth. Thus, while we are currently experiencing a low point, you can anticipate a more consistent outlook moving forward, as Craig has mentioned. Now, back to Werner.

James, I hope this answered your questions because otherwise we go to the next question.

Next question is from the line of Derik de Bruin with Bank of America.

A couple here. I guess the first one, you're looking at your net debt ratio, your leverage ratio at 7.7x. How should we think about that, particularly given higher interest rates in the environment right now? And how should we sort of think about your interest expense and how that sort of trending in the next year? That's one. And I won't bombard on one since they're different. So let's do that one first.

Okay. First one goes to Enno.

Yes, sure. Overall, I think you have seen that our net debt leverage, excluding IFRS 16, that was the number you were just referring to is currently at minus 7.7x negative. So a lot of headroom here, if you assume that normally, we clearly have the intention never to go beyond plus 3x as this is still investment grade. So there's a lot of headroom here. Currently, I mean, that means we have a clearly positive cash position. We will continue to invest significantly. I mean we gave you some examples here today, CapEx for growth CapEx for Just J.POD in the U.S. and Toulouse, but also our equity portfolio. And despite having a positive operational cash flow that we have seen last year and even more this year due to the prepayment also of Just J.POD. We will probably see a decrease of our net cash position, and that would also mean that this net debt leverage would come closer to zero over time. That said, still being in a very comfortable zone and again, not really leveraging the balance sheet at this point in time, fully from a debt structure side.

Great. And I can appreciate that milestones are difficult to predict and such. But how should we think about, at least for Just, moving beyond the fourth quarter into 2023 and just sort of thinking about this? Can you give us a bit of a bracket of what is highly likely versus what is less likely? I'm just trying to get a sense of the milestone pacing going forward.

So overall, the portfolio of potential milestones has been increasing dramatically because we have more partnerships with a higher cascade of milestones, and we typically also have very well established projects to achieve these milestone events going forward. Just let me highlight one, there is chemical projects with BMS, coming out of our new collaboration where we will see clinical progress in clinical data, some, for example, iPSC-derived neurodegenerative projects in early 2023, and that's, of course, significant. And that's not only financially significant, but it is validation of the platforms and the prediction quality of the platforms, which is very, very exciting.

Got it. And then just one final question. Can you provide a bit more insight into your early-stage biotech business? How have the number of deals or relationships changed from 2021 to 2022? Has the number increased while the revenues decreased? I’d like some perspective on this. Several of your competitors have mentioned delays and extended sales cycles. I’m looking for additional details on what your biotech situation looks like.

Yes. Maybe also this is a question from a business development perspective, back to Matthias how we look at the segments here overall.

Yes. To start with the last part, we have not seen a slowdown. We see a strong demand. That is likely because our customers see broadly Evotec as a part of the answer in an era where cost-effective and efficient solutions are required. In terms of customer segments, we have a balanced portfolio between biotech and big pharma. As a biotech, of course, the whole range from early clinical to later serious stage biotech. We can only see in terms of order book that the demand is proportional to the revenue growth that we have reported. So we have not seen a significant shift in the composition of our customer segments. That's all I can say at this moment.

And maybe one number here; at every moment in time, we are working with more than 500 partners in the smaller biotech world together, and that's also constituting a large portfolio of different stages of experiments, different stages of risk exposure, and different stages of funding. And that's why here, there's a positive portfolio effect kicking in from all the services that we are providing and that there's not a particular, for example, single service that would be exposed right now more than another one. Yes, we don't ignore the funding environment out there. Not at all. We have part of this world. But from how we can deal with it from our portfolio at this stage, we don't see a large problem.

Maybe to very briefly add also the accounting perspective to this. For the year so far, we have not had any significant adjustments in our revenue recognition based on receivables not being paid. This is clearly below 1%, and I hope we can maintain it that way.

Next question is from the line of Peter Welford with Jefferies.

Peter, we cannot hear you. Now we can hear you.

Yes, I have a couple of questions. Firstly, could you provide some clarity on the milestones? What percentage of these milestones are associated with Bristol Myers? Should we expect that most of them are tied to Bristol, or is there a more varied customer base influencing these milestones by the year's end? Secondly, regarding Just-Biologics, I'd like to understand the timing of revenue recognition you mentioned. You indicated that it typically occurs 9 to 18 months after a contract is signed. Is this timing connected to your operational runs and shipping to the customer, or is it more about the technical aspects of preparing the customer's product in your facility, including setting up the reactor and process for them? Lastly, you mentioned that you would disclose the second DOD award by the end of the year to give us insight into its scale. Is this also applicable to the biosimilar contract, or will we only learn about that once we have outcomes regarding its success or failure? Thank you.

In response to the third question, I will address the milestone inquiry and touch on Just and revenue recognition, with Craig providing additional details. Regarding the biosimilars transaction, we will not be rushed by external pressures and will explore as many options as needed within our platform, so there is no set timeline. We're currently running a small pilot, and while this may lead to a larger transaction, it's uncertain at this stage. The Department of Defense has already made an award, but the specifics of the work packages are still being clarified. We aim to provide guidance on what we expect, likely in the vicinity of the first package we received, which was $49.9 million—it could vary somewhat as this reflects only the discovery and development phase, not the subsequent sales from these contracts. This is quite significant when viewed over a two to five-year period, as we have a diverse group of partners that offers substantial exposure to milestones. In relation to your first question, we have successfully closed a large transaction with Lilly this year, in addition to a significant deal with Novo Nordisk and a major partnership with BMS focusing on target protein degradation. We also have an ongoing substantial partnership with BMS in neuroscience. While there is a notable emphasis on BMS milestones due to the importance of these biological events, the potential sources of milestones are quite extensive, with over 30 companies involved. However, for Q4, you should particularly note the focus on BMS, as multiple transactions are currently active with them. As for the Just question, I’ll hand it back to Craig.

Yes, absolutely right. So the typical spread out of the revenue recognition might well be anything from 9 to 18 months, and that's the nature of the kind of integrated and holistic nature of the contracts that we're tending to sign. So it's not a delay on arrival of materials. It's not a delay on beginning the work. It's rather more that if someone comes and says they want a competitive package to take a starting project through to a particular phase like a preclinical or Phase I batch, then there will be numbers of stages of work such as sales expansion, process development, manufacturing run shipping and close completion. Those kinds of things can take many months and they're sequential. Revenue recognition is done as a percentage completion, and that's why it gets smoothed out over that period where the work is conducted. So I hope that gives you a clear answer.

Next question is from the line of Steven Mah with Cowen.

Steve, we cannot hear you. Otherwise, please don't hesitate just to send us an e-mail or call us directly. There is no problem to answer any question also beyond this call.

We will now proceed with Joe Hedden from Rx Securities.

You recently mentioned the commercial launch of PanHunter. Could you provide more details on the types of customers you are targeting with the software that you may not have reached previously? Also, can you share any information regarding subscription costs and your expectations for future revenue contributions once the software gains traction?

Yes. So maybe with this also to bring Cord into the room because Cord is one of the masterminds behind PanHunter. First, to give you a highlight of what PanHunter is and how we think that this will impact the industry.

Yes. So happy to answer this question. So first of all, PanHunter is a tool that really allows the comprehensive and combined analysis of Omics data and bringing it into context with particular clinical data sets, but also preclinical pharmacology data sets. We believe that this is a tool as the megatrend of precision medicine approaches and more personalized medicine approaches in the industry continues to move forward. This is a tool that the more Omics data is being used, the more these kinds of tools will be required in the industry. We feel that PanHunter is probably one of the most comprehensive tools that allows the analysis of these huge data sets and, with that, we believe that our customers will not be just in the pharma environment, where a lot of fund companies have their internal capabilities, but this is a tool to make the analysis feasible for simple bench scientists to play and crunch the data with the data sets independent of direct support from a data scientist. So it's pharma we are targeting, but also, in particular, biotech companies that may not have bioinformatics departments set up to the extent that they can deal with these huge amounts of Omics data that are increasingly coming online through public domain sources as well as in-house generation of these kinds of data sets. The exact pricing model, et cetera, would depend on the extent of the use of the tool as well as the number of people expected to use it. Here, we have not disclosed any cost structures as of yet. But we are already working with a number of companies or collaborators already in the biotech sector and the pharma sector that are accessing these tools based on a subscription model essentially. So that's where we currently are with that. It's a tool that will be built out in the future even further beyond where it is today, but it is an excellent starting point. From what we know about the field, the tool is currently the most comprehensive available.

And let me just highlight that for the first half of 2023, we are planning to highlight our PanOmics focus area, and it is also PanHunter there; we will give much more detail after this first phase of, I would say, experimental launching of PanHunter, and then also we make kind of the Capital Markets Day around PanOmics or a large part of that on PanOmics. So a lot of more handsets will come in the first half of '23 on that. We go to the next question, please.

Next question is from the line of Steven Mah with Cowen.

Great. Can you guys hear me?

Now much better.

Great. Appreciate it. Doing great. A lot of ground already covered. So I just have one question. I appreciate the color that you guys have said that the R&D projects, the pace of that is not slowing given the macro environment. But I had a question specifically on new partners that you're signing up, especially with maybe smaller biotech companies. Has the macro environment impacted on the new partner deal structures? Are these smaller companies asking for less upfront payment and more back-end economics? Are there any trends or color you can share with us?

So maybe also to reiterate here for typically smaller biotech companies, there is no differentiation on payment structure, fee structures, or upfront structures. Most of that is starting with very classic fee-for-service payments. And that's something that has not changed in how we approach that market. The other thing why we are growing so nicely is most of it is coming that we are going deeper in our relationships and not broader. So yes, it could very well be that we are not broadening out to more partners in the start-up biotech world at this stage. But with those who are well funded, we see a deepening of the relationships because they realize that working with Evotec, as a flexible force versus building up fixed costs is increasing their chances of achieving next fundable milestones. That's why I think where I would focus on from a cost perspective is are we going deeper with the right companies and not broader with those who are not funded or have problems getting funded at this stage. That's why, at this stage, we are very hesitant to start relationships because, from an opportunity cost perspective, then we would use our capacities where we have the best opportunity to optimize gross margin going forward and achieve operational leverage. So that's the situation as of now with biotech funding. As I said before, into '23, we see very strong growth already but if biotech funding remains throughout the whole of '23 into '24, then this will potentially also impact us. And then we would simply look at whether we should slow down the growth of our capacities. But that's the definition of what we are talking about here, nothing else.

Your next question is from the line of Falko Friedrichs of Deutsche Bank.

Two questions, please. Firstly, thanks for providing this indication that double-digit sales growth could be doable in 2023. Is it possible that you also give us some kind of early flavor on potential earnings growth next year? I'm looking at consensus, which assumes about 40% growth on adjusted EBITDA, close to €150 million. Are you able to at least give us an indication of whether that is in the cards or not next year? And then my second question is on your BMS partnerships. Can you share if there are any significant milestone events or scientific events in general next year that we can be excited about?

So maybe the second question on BMS goes back to Cord again to give you a bit of a flavor on neurodegeneration and target import in neurodegeneration especially. And when it comes to '23 top line growth, double-digit. I think we are very confident on that. And I think what's very clear to us is that operational leverage when it comes to the bottom line has to be improved and it has to be significantly improved. And that's what we're working on, and that's why we are very confident into '23 that EBITDA levels will be much stronger than what you're seeing right now. You should never forget our EBITDA levels at this stage are impacted by the start-up sales of Just - Evotec Biologics that are impacted by energy costs and are delayed by the adoption of prices that we are able to make into our partnering world, where we don't see a hesitance except for higher prices, but where it just takes time to get these through to higher milestones, through better-controlled costs and also better planning of costs, for example, we will do this with energy and other things, and we expect significant better operational leverage on EBITDA going forward.

So in regards to potential milestone payments, the pipeline of milestone-bearing and royalty-bearing projects is continuously growing in our pipeline and will continue to grow. In this pipeline, there are a number of potentially smaller events, but there are also a couple of potential bigger events that are significant double-digit million milestone payments that we expect. And once again, the exact timing of these milestones is never quite clear, but we are quite optimistic that there are several significant milestone-bearing events in 2023.

And maybe just to highlight one, there are chemical projects on neurodegeneration in BMS coming out of our new collaboration, where we will see clinical progress in clinical data, some, for example, iPSC-derived neurodegenerative projects in early 2023. And that's, of course, significant. And that's not only financially significant, but that's from a validation of the platforms and also from a prediction quality of the platforms, very, very exciting.

A quick follow-up. If I can try to tease you a little bit more on the EBITDA for next year. So the market expectations around €150 million, is that something you would at this point already say, well, that is definitely a bit too optimistic, most likely, or is there at least in your very early thinking about the next year?

I mean, we are in the budget-making process. We are preparing for all of that. If you want to have an exact number of €150 million, I would say that a stretched number. From today's perspective, I think it's just too high. Having said that, it will be very much dependent on achievement of milestones and other things. Most importantly, it will depend on the pickup of Just - Evotec Biologics into 2023. I would probably not make my model as deep as this indicates, but I would operate the long-term perspective of the model and the quality of the model into the long term. That's as much as I can give away.

Final question is from the line of Victoria English with Evernow Publishing Limited.

Yes, Werner. Regarding milestones, to what extent is the decline in milestone payments due to the cancellation of programs by your client companies? That's my first question. Also, I'm having some difficulty understanding your plans for iPSCs. Do you envision yourself as a significant manufacturer of these cells?

Thank you so much, Victoria. Maybe we go on the second question to Cord on the, so to say, short-term vision and longer-term vision of iPSCs, but on the volatility of milestones, there's nothing that comes from cancellations, really nothing. If there are milestones that you currently don't see in our EBITDA or on our top line, then it's basically biology or safety effects that have just not come through. Let me head again here that P2X3 would have been associated with significant milestones this year, which will not come in 2022 and also not in '23. There were other milestone effects, which were biology driven, but it's nothing that came from cancellations.

And this is Cord speaking. In regards to cell therapy, iPSC-based cell therapy manufacturing, generally, we are all aware of the fact that autologous CAR-T based cell therapies have been tremendously successful in treating cancer patients in particular. Also, I think, aware of the fact that in many other indications, cell therapies seem to be the modality of choice in order to develop disease-modifying therapies. In both areas, iPSC-based cell therapy approaches are, in many ways, believed to be superior to autologous cell therapies because you can expand them essentially indefinitely and scale manufacturing here to potentially wider markets also than with a different cost base. Our most advanced project is the diabetes project, which is currently moving towards the clinic. Here, we essentially need to bring a process that was established as a research protocol into GMP manufacturing with all the associated requirements in terms of GMP compliance cell lines, et cetera. We fully intend to become one of the key manufacturers in the space of iPSC-based cell therapies. We believe they currently have very few players in the market space who can prepare sufficient material for clinical trials, even, so we see this as a huge opportunity going forward to seamlessly translate our iPSC platform, which is broad and effective in the drug discovery space, and also leverage that into the cell therapy space.

With this, let me reiterate my offer. If you have any further questions, please don't hesitate to reach out either to Volker or to me directly, and we are happy to answer questions. Otherwise, thanks for following Evotec. Thank you so much for understanding where we are with the Company and guiding us into the next years together with your analysis and your view of the Company. With this, I wish you a great day, and hope to see you also. All the best.