Evotec SE (EVO) Q2 2015 Earnings Report, Transcript and Summary

Dear, ladies and gentlemen. Welcome to the Conference Call of Evotec AG. At our customer’s request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. [Operator instructions] May I now hand you over to Dr. Lanthaler, who will lead you through this conference. Please go ahead, sir.

Welcome. My name is Werner Lanthaler. Welcome to Evotec’s call for the first half year of 2015. I’m here with my management team Colin Bond, our CFO; Mario Polywka, our COO; and Cord Dohrmann, our CSO, and we will together go through this presentation, that is available on the internet for you. If you go to Page #4 of our presentation, it’s a great pleasure for me to report back to you that the state of the company is strong. Actually the state of the company is very strong. This applies to both of our segments, Evotec Execute and to Evotec Innovate. Just to give you a few highlights, it is safe to say that we see an excellent performance of our Evotec Execute services and we see a very, very accelerated clear strategy for our Evotec Innovate, Cure X and Target X programs. Just to give you a few examples of the first half, we are very happy that we could show an Evotec Execute new alliances with biotech and pharma companies, we see milestones coming in for example out of our Bayer collaboration, of course, we will highlight also through this call the initiated collaboration with Sanofi on multiple fronts and we see also which is key for us that the idea of building more capacity for a global service company with our build-up in France and also our increasing build-up in the U.S. shows it’s initial fruits already. Evotec Innovate had to report a failure of our Phase III missed -- Phase IIb missed endpoint with Roche, which you have seen in Alzheimer’s disease. But on the other hand, our portfolio works, because you had also seen in the last few weeks that it works possible to rollover TargetImmuniT, which was a partnership together -- which is a partnership together with Apeiron Biologics to Sanofi and a highly innovative diabetes project is also partnered in the field out of Evotec Innovate. When it comes to our existing about 70 options in preclinical discovery and clinical stage, you can see that there is clear progress of the portfolio and we are also adding novel academic alliances into this, for example, the Gladstone Institute. On the corporate level, we see extended industrial reach of our company also by adding new talent on our progress report and we are very happy that Elaine Sullivan, former Eli Lilly has joined Evotec. When taking this into numbers on Page #5 and Colin Bond will go into this in more detail. I think there are not many companies globally out there, who can report more than 37% growth of the first half year. And more importantly, who can show that the acceleration of an Innovate strategy path with a wonderful performing Execute business really is delivering innovation on the version of positive EBITDA through the first half year. We do this with the strongest cash position that the company has ever had with more than €140 million at this stage in our hand, where we also have the freedom to go into projects that have a long-term view. For example in Innovate, we are touching projects that are not project that immediately have to show success, but that are truly disruptive technologies as Cord will tell you in few minutes. Our guidance 2015 is comfortably confirmed at this stage and Colin will also go into the underlying numbers for you. On this basis before I hand over to my colleagues and on Page #6, let me just highlight. Our business model works and we have achieved through our growth a clear number one position for both segments. Our Evotec Execute services that are the highest quality and most capital efficiency drug discovery outsourcing, tools available for pharma and biotech, and we are the bridge from academia to pharma, which Evotec Innovate increasing shows. At this point, let me hand over to Mario, who will give you deeper insights into Evotec Execute.

Thank you, Werner, and good afternoon, to all of you. Just to remind you, as Werner said, Evotec Execute is the business segment, which delivers on programs and projects, which are based on our partners’ intellectual property. But again we should remind you all that the overall platform which is the world leading to our discovery platform and our market supports both Evotec Execute and Evotec Innovate. This platform is now complete through the acquisition and integration of the Toulouse site as shown on page eight, page eight and also the recent completion of our the first phase of our biology facility in Princeton, which is now serving a major U.S. pharma partner. So in total now, Evotec is a truly global company with almost 1,000 employees. Page nine, the key highlights, so a very strong business, as again Werner has alluded to, the first half of just under €60 million of revenue, up nearly 60%, compared to the prior year, with a very healthy EBITDA of 17%, so just under €10 million. We have seen a number of alliances, new alliances initiated, of course, we don’t publish everything that comes our way during the half, but key alliances were with Facio to identify treatments for FSHD with the Gladstone Institutes, with Spero, C4X and Padlock. We also see a significant come back from the Asian market, Japan especially which manifested over an increase number of screens compared to previous years. Finally, ongoing programs with companies such as Navitor and Active Biotech, and the NIH continued to provide a strong validation of the excellent value and success we bring to our partners. On top of this we provide guidance takes you revenue wise to revenues excluding milestones and licenses, but we were very pleased to report another milestone within our endometriosis collaboration with Bayer, as well as a smaller milestone with an undisclosed partner. We continue to be confident in the strong performance of the Evotec Execute segment through the rest of 2015. We anticipate communicating further progress in our ongoing partnerships, as well as new and existing ones under discussion over the three to six months. I will now hand over to Cord to elaborate on the Innovate segment.

Good afternoon, everybody. My name is Cord Dohrmann and it is my pleasure to give you an update on Evotec Innovate. On page 12 you can see our very broad and deep pipeline of Innovate product opportunities. Most of these products are very much on track and continued to make progress. We already reported as I would go Evotec 302, that Evotec 302 a product that is in partnership with Roche have missed its primary endpoint in the Phase IIb trial in Alzheimer’s disease recently and we cannot at this point comment further on this program. However, despite this setback, we continue to grow our pipeline of partner product opportunities. Over the last few days, we have announced two discovery stage deals that are based on our Innovate strategy and that we can now add to our partner product pipeline. On page 12 you can see that these two deals fall into two key areas of Evotec indication. First of all, the TargetImmuniT deal is a cancer immunotherapy program in the oncology field, where we are focusing on small molecule-based cancer immunotherapy. The second deal is in diabetes based on TargetBCD, substantial beta cell differentiator and this particular project is based on accessing an unlimited supply of human beta cells to develop a cell-based therapy in diabetes, but also to do functional things based on human beta cells. Today, I would like to give a little bit more background on these two recent deals, the five new areas of diabetes and oncology. I will start with TargetImmuniT program and it was only in 2013 that cancer immunotherapy was selected as the breakthrough of the year in the pharma industry. This was driven primarily by clinical results achieved by molecule antibodies that target checkpoint inhibitors such as CTLA-4 and PD-1. At Evotec, we decided to start our first oncology R&D project in immune oncology as early as 2012, 2013 together with the Apeiron Biologics. We turn this project TargetImmuniT and within this project rather than focusing on antibodies targeting PD1 with other checkpoint target, we took a very complementary approach focusing in particular on the direct activation of T cells and attract beta cells by a small molecule. We are proud that we could convince our colleagues at Sanofi to join this effort, adding yet another program to our more extensive portfolio of cancer project that they’re already pursuing together with Sanofi. TargetImmuniT will enroll more than 20 scientist at Evotec and Apeiron supported by Sanofi and we are eligible for significant preclinical, clinical and regulatory milestones, as well as royalties on commercialization. On page 15, we can see the cancer immunotherapy market. The potential market for cancer for immunotherapy is of course enormous. It is estimated to grow to roughly €45 billion in 2023. Currently, late-stage pipelines are still dominated by antibodies. However, this will most likely change as we have seen another area ands they will be more focus on small molecule project in the future. On page 16, we can see how TargetImmuniT fits into the cancer immunotherapy field. The cancer immunotherapy field is really about targeting the immune system rather than targeting the two [tumor] [ph] cells directly. There have been great advances to checkpoint inhibitor but also CAR T-cell approaches into a lesser than with cell-cased vaccination approaches. Our approach once again is highly complementary to these approaches and that we are directly targeting the activation of the immune system in specifically T-cell from killer cells by a small molecule. Our approach clearly has first-in-class potential as a standalone treatment, but also in combination to checkpoint inhibitor on most other approaches in the cancer immunotherapy field. In summary, we are very excited about this opportunity to develop first-in-class approaches in the immune oncology field together that with our partner Apeiron and Sanofi, and we are optimistic that there will be more to come. Now I would like to turn to our second partnership on page 17, based on an internal project at Evotec, which is called TargetBCD beta cell differentiation in diabetes. You may know that Evotec has a long history in diabetes and beta cells with multiple partnerships. This partnership really stands out in a number of ways. TargetBCD is a program that was initially initiated Evotec in 2014, based on our experience in beta cell regeneration field and key application and progress in the field that demonstrated, there is possible to turn human iPS cell into mature beta cell in culture. This discovery, which really came originally from Doug Melton’s Laboratory at Harvard open up two potential product opportunities. First of all, a beta cell based therapy and second of all, drugs training on beta cell protective or regenerative drugs based on human beta cell. Last week, we signed an agreement on TargetBCD with Sanofi, which is one of the three leading diabetes companies in the world. The agreement comes as an upfront payment of €3 million, potential pre-clinical, clinical and regulatory milestones of upto €300 million, as well as significant royalties upon commercialization of [Eva] [ph] a cell based therapy or a drug protective, beta cell protective or regenerative drug. The market opportunity is exemplified on page 18. It is an enormous market opportunity as the prevalence of the disease keep growing at alarming rate. Currently, we have about 400 million diabetic patients worldwide and this number is expected to grow to about 600 million by 2035. Beta cell replacement therapy and/or beta cell protective or regenerative drugs, also disease-modifying product opportunities and are therefore go to a heart of this market. On page 19, you can see that we’re pursuing this kind of cell have been very challenging but upto now because of limited access to human beta cell is extremely difficult. We see ability now to derive mature human beta cell to stem cell based essentially an unlimited supply of human beta cell that can be used for cell replacement therapy and for drug training. We are especially quite excited about the development of a cell replacement therapy as here clinical proof-of-concept have been established for the so called Edmonton protocol. Through this protocol, patients have been treated already successfully with human [indiscernible] derived from the over donors. Beyond Evotec and Sanofi, there are a number of additional players in this field, such as Novo, ViaCyte, BetaLogics and Sorrento Therapeutics, with ViaCyte currently in the lead but the most advanced product in a Phase I, II study. We as well as others believe that there is are significant room for improvement on the ViaCyte product in terms of cells that can be used but also in terms of the encapsulation device, which is necessary to protect transplant of cells from immune destruction. In conclusion, Evotec Innovate strategy continues to deliver exciting collaborations and product opportunities, which are first-in-class, potentially disease-modifying and carry significant upside for Evotec. On page 20, you can see our current portfolio of Innovate project. We continue to build Innovate our portfolio here and be excited about many more ongoing internal on the project. We are also very optimistic that our Innovate strategy will continue to deliver these types of partnerships in the short to medium term and are looking forward to many of it. With this, I’d like to thank you very much and will hand over to Colin Bond.

Good afternoon, everyone. On page 23, you see the P&L for the group, the first six months of 2015. Revenues increased by 37% compared to the prior year period to €55 million. This increase was due to the Sanofi collaborations strong growth in the base business, milestone contributions and favorable FX effects. The gross margin for the first six months of 2015 of 28.7% was slightly reduced compared to the prior year period of 29.4%. This was primarily due to one-time start-up costs in respect to the new facility in Princeton. SG&A cost increased by 39% compared to the prior-year period to €12.4 million. This was largely due to one-time transaction and compensation costs related to the collaboration with Sanofi of €1.8 million and ongoing SG&A cost for Evotec, France of €800,000. A one-time bargain purchase of €18.5 million which recorded in respect to the acquisition of Evotec, France, this represents the difference between the amount paid for Evotec, France and the net book value of the assets acquired at the closing. This amount is eliminated in the calculation of EBITDA, which is the first six months increase to €800,000 compared to €600,000 in the prior year period. At this stage, I’d like to just highlight the error in the report that’s published on our website on page six. We say that the revenues excluding the milestones, upfronts and licenses increased by 3% to €41.1 million compared to €39.9 million in the prior year. This is actually an error. This deals with the total numbers in the business and the correct numbers are €36.7 million for the first half of 2015 compared to €34.3 million in the prior-year period, which is an increase actually of 7%. We will change the report on website immediately after this call. On slide 24. Slide 24 shows the P&L for the first six months according to the Execute and Innovate segments. The Execute segment reported strong revenue growth for the first six months of 2015 compared to the prior year period. In addition, the gross margin was stable at 23.8%, despite the costs related to the aforementioned Princeton startup and the relatively low level of milestones in the first half of 2015. As a result, the Execute segment reported a strong positive EBITDA of €9.8 million or 16.6% as a percentage of revenues. Meanwhile, in accordance with our strategy, the Innovate segment reported a high gross margin of 45.7% as a result of upfront payments received in connection with the key collaboration. In addition, there was a high, an increased level of R&D investment in Cure X and Target X initiatives. Page 25. Page 25 shows the P&L of the group Q2 2015. Revenues increased by 49% compared to the prior year period to €33.4 million. However, EBITDA decreased from €1.9 million in Q2 2014 to €1.1 million in Q2 2015, as a result of the one-time transaction and compensation cost related to the collaboration with Sanofi. Slide 26, the left hand box shows the three year trending revenues. As previously mentioned, overall revenues increased by 37% for the first six months of 2015 compared to the same period of prior year. The right hand box shows the three year trending gross margin. The slight reduction in gross margin to 22.6% in the first six months of 2015 compared to 23.2% is of course due to the one-time start-up cost of Princeton as I’ve previously addressed. Slide 27. Slide 27 highlights our strategies of the Execute and Innovate segments reflected in the key financial indicators for the six months of 2015. For the Execute segment, this consist of strong revenue growth, stable gross margin, a low level of R&D expenditure and a relatively high and improving EBITDA as a percentage of sales. The Innovate segment reports relatively low revenues over the high gross margin percentage and an increased level of investment in Cure X and Target X initiatives. Slide 28. Slide 28 is a summary of our guidance which is unchanged since the expected year-over-year growth in base revenues excluding milestones, upfronts and licenses which increased from plus 20% to plus 35% on the 12th of May 2015. EBITDA will be positive in 2015 and liquidity is expected to be well in excess of $100 million at the end of 2015. R&D investments in 2015 will be in the range of €15 million to €20 million and CapEx will be up to €10 million. At this point, I would like to hand back to Werner, who will give an update on the outlook for the remainder of the year.

Thank you very much. Let me round up with a strong outlook for the second half of 2015 and what we think is still to come this year. We see in our Execute business a clear trend spots and lots of larger deals that are lined up for later 2015, beginning of 2016 where our platform makes a difference and shows that innovation efficiency can be reached by working together with Evotec. On our Innovate segment, we see the need of the bridge between academia and pharma and Evotec playing a key role in translating breakthrough science into pharmaceutical grade project. On that note, I think for 2016, you will still hear a lot of us and we also can at this stage already say that 2016 is a great year to come. Let me thank you. Let me thank my team. Let me thank the scientists that are working for Evotec and our partners that work with Evotec. And let me thank you also on the telephone call because the reason that we are here as a public company is also due to the fact that you promote what we are doing out there in the capital market. Thank you so much. We, of course, open now for all questions and we look forward to questions if you push the buttons on your keypad.

[Operator Instructions] The first question is from Volker Braun of Bankhaus Lampe. Your line is now open.

Yes. Hello. Thanks for taking my question. Two are from me, first is related to the revenues related to milestones and upfronts. Could you provide us with a split by segment, so split by EVT Execute and Innovate? And secondly with regards to the two new alliances with Sanofi in oncology and diabetes? How far away are we from a potential entrance of the first candidate into clinical trials and either of the two collaborations?

First question, Colin will give an answer. Second question, I will answer.

The first question, Volker, the split in base revenue excluding milestones, upfronts and licenses, we don’t give that according to the two segments. We just do it for the drug business.

What a pity?

And on the stage of the collaborations with Sanofi and how soon we can expect clinical project here, let me maybe initiate the answer and then hand over to Cord. I think both of the collaborations are early stage but really disruptive technologies. And from a ranking at this stage, I would say the earlier potential clinical trial could be seen in cell therapy in diabetes and TargetImmuniT of small molecules for cancer immunotherapy and also other small molecule therapies in diabetes will take a while. But having said that, no one is further advanced than Evotec and our partners in these breakthrough technologies at this stage. Cord has nothing to add.

Cord has nothing to add. Okay. Thank you very much.

Thank you.

The next question is from Michael Higgins of ROTH Capital. Your line is now open.

Thank you, Operator. Congratulations guys on excellent quarter. You are clicking in all cylinders. It surprised to see the extent investors were so hopeful over 302’s phase IIb study. You’ve had lot going on, I’ll ask on few topics. First off, the integration of the Sanofi employees that were not initially into the Execute or Innovate programs. How is the integration of those employees been coming along?

Hi Michael. It’s Mario here. While it has gone tremendous well, probably better than we would have anticipated. So at the moment, we have third-party business. X of Sanofi and need to lose five significant MSA or surface contract with Sanofi which is much larger than we originally anticipated and of course, we have significant amount of oncology innovate, there has been progress there. So at the moment, it’s fair to say that almost all employees are very actively engaged in either third-party work or R&D work.

Okay. I agree.

And I would also say that we have been recruiting as well over the last six weeks to two months, ready to start complementing and augmenting the skill sets on the science. So very positive start in the first three months and two weeks.

Okay. Thanks. You know, on sourcing the Execute gains match very with Innovate’s losses. Going forward, I’m getting the sense that you maybe deploying your capital that you have been taking a look, we will be taking a look further at additional strategic opportunities. In what way, will you leverage your model as we go forward with these potential strategic acquisitions?

We, first, comment probably by saying it’s a coincidence that these numbers at this stage match because we are not holding back any innovation idea or anything that will be at this stage would think that we can create significant value for the shareholder. Having said that, the idea of fantastic partners going together with us in massive resource pools on big ideas is something which is sometimes necessary to win in these ideas. So let’s take for example, our beta cell differentiation project. Winning this idea especially means putting know how competent clinical regulatory in the whole supply chain expertise that know how behind such a project which brings you very fast into dimensions of between 20 and 40 and sometimes even larger number of scientists that has to be put behind these projects and of course here working together with companies makes total sense not only from a cost perspective but especially from a competent perspective because these are true pharma projects that are build to go for product. Well, let me highlight here another partnership which we really like a lot together with Bayer or another partnership together with Johnson & Johnson or a partnership that we have with Ingelheim ongoing or with UCB. These are products driven partnership that’s the key over to the message and not just where we are optimizing cost. Having said that, we think the recent months have shown to us that Evotec innovate works so that business model works. And that we can by using the variable resources on our platform more capital efficient than anyone else roll over projects into the pharma industry and that’s something that we will continue, we might continue in a way that we will seek later stage value points before partnering. And this will be driven by who is the most efficient party to bring later stage value point forward and also here note on who is the cost bearer of this value point. But this depends on the data that we will generate on this project and here I think we can allow ourselves the right strategy for every project by basically looking at data and going to next data point either alone or with partners and that will be possible with this strategy going forward. We are very happy to have this strong cash position at this stage because it gives us flexibility to be even more focused to what creates more shareholder value.

Okay. Thanks. And then just one follow-up on the Alzheimer’s venture. What kind of economics are involved there with this venture including your investments, potential returns and secured returns from this?

With Alzheimer's venture, you mean our partnership with Janssen or you mean the failed Phase IIb with Roche?

With Gladstone?

With Gladstone, sorry. With Gladstone, at this stage I would say it’s an early stage partnership. Gladstone is accessing our platform and where multiple options for a joint business plan can arise, but it would be too early to comment on that. But I think what is just endorsement in half year is to have another leader in the field of novel Alzheimer research joining force is the Evotec, which is coming to the same force so to say on a platform basis like Johnson & Johnson Innovation like Roche and like other collaborators, who are accessing this platform.

Okay. Very good. Thanks for the colorful feedback. Jump back in the queue. Thanks, guys.

Pleasure.

[Operator Instructions] The next question is from Victoria English of Mednous.

Good morning. Good afternoon. I don’t know which it is. Good afternoon. Three questions. The first concerns the revenue forecast or the revenue performance, I mean, in the first half. What percentage of the 37% increase is accounted for favorable exchange rate? That’s the first question. The second question concerns the 10 million that you’re forecasting to spend on capacity development, capacity increases, where will that take place? And the third question concerns Alzheimer’s and whether you have a view, this is a speculative question really, on whether -- what approach we should be taking in Alzheimer’s? Should we be asking ourselves if the targets are that we are currently looking at or not, simply good enough or not, or should we be looking at diagnostics?

Thank you so much. Question one and two go to Colin. Question three goes to Cord.

Victoria, it’s Colin here. As I said early on in my part of the presentation, the corrected increase on the base revenues was 7%. Now what we see that includes a currency impact, but what it doesn’t include is what Mario referred to, which is only a framework we are doing for Sanofi in Toulouse, which is really part of our core business. So eliminating the currency impact but bringing in the additional work that we’re doing for Sanofi, hopefully we believe our growth in the core business is more like 8% to 9%.

Thank you.

And then secondly, the 10 million CapEx spending, totally that’s being spent in accordance to the relative size, the different sides, but no specific side in which has been concentrated. It’s really across the board according to the need and the size of the side.

Thank you.

Victoria, this is Cord speaking. Your question regards to Alzheimer’s disease and what’s the right approach to Alzheimer’s disease. I think it’s fair to say that Alzheimer’s disease is a very complex disease. And under Alzheimer’s disease, it is also probably clear that it lumps together many different mechanisms that are drivers of the disease. So I think we need to drive the progress in Alzheimer’s disease from many different fronts. First of all, I think it is very important to be able to stratify the disease more clearly about contributing and based upon targets and these mechanisms through immune the progress a little. And once you be able to rejudge progression of the disease, it’s also realigned on very soft endpoint of the clinic. And here it is important to have a much stringent market strategy, which once again goes hand in hand with the mechanisms and targets that should be pursued. And then finally, it’s really about also thinking about the right patient populations to include in certain studies. It is really the earlier stage patients said we should have [indiscernible] of latest and this once again aid depending on the another line activity that’s hard. We are very actually looking by leaning more about these house, look at what are the key drivers, and power to generate read-outs that go beyond behavioral test, et cetera. So I think we at Evotec are much on the forefront, still in regards to novel mechanisms, novel targets, and this is what we are banking on and hope to see a complement to portfolio of targets that are clearly driven by the pharma industry at large.

Thank you very much.

The next question is from Heinz Müller of DZ Bank. Your line is open. Heinz Müller: Hello. Good afternoon, my presence. First question is regard to [Technical Difficulty] in the second rate, which increased rough 6% from seven-tenth point for $1 million. So is the one-time effect, maintain the cost. Second question is having the P%L and looking for you showed the gross growth right through different cost sides like perhaps cost of goods sold which increased by roughly 59%. So if I adjust the figures by the one-time effect of the bargain purchase, your operational EBIT is negative minus 2.2 million versus minus 83,000 in the last month? So these are not like precision, Now the Sanofi acquisition effect or am I wrong?

First question goes to Cord. Second question goes to Colin.

With regards to the intensity, so this is a difficult question to answer because of the R&D intensity, it’s a function of opportunity as we see it come along. We’re running a fairly large portfolio of Innovate projects. When we roll these projects over into from partnerships, this lead to quite a strong reduction in the R&D budget unless we keep fitting them into future opportunities. And as we have been in the past very successful in driving early stage partnerships, we are now looking for more and more opportunities that would allow us to bring projects further along Belgum to change partner and this may require additional investments. So ultimately, I would say from our current outlook we would probably like to maintain the level of R&D intensity, but we may increase if we do see opportunities.

And it’s fair to say it could also decrease given the speed of how we will over project Italy the industry at this stage.

Yes. And the second question regarding the underlying EBITDA, of course it’s something that we don’t publish, but we focus ib very much internally to look at the one-offs that occurred each year. And last year we had the benefit and the fact that the collaboration we have again [QB2] [ph] is terminated and we recognized all deferred revenues in the first half of the year that gave us that significant positive.\ In addition now collaboration with for antibody was terminated and we oversee the €1 million payment and so those were the two very significant payables we had in the first half of last year. And in the first half of this year, we’ve had the one-time cost relating to Sanofi collaboration transaction and compensation cost of €2 million, which are negative. And in addition, we have the startup of Princeton I mentioned during my comment or part of the presentation. And adjusting for the those effects, there was a slight improvement in the underlying margin in the first half of 2015 compared to 2014. Heinz Müller: Okay. Thank you.

There are no further questions. I hand back to the speakers.

We want to thank you again for following Evotec. We want to round up this conference call by highlighting again that we think and can prove that our business model works and we are very happy that we were able to report a strong first half of Evotec Execute and then very strong first half of Evotec Innovate. Thank you so much.

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