Evotec SE (EVO) Q4 2019 Earnings Report, Transcript and Summary

Dear, ladies and gentlemen, welcome to the conference call of Evotec SE. At our customers’ 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 over to Werner Lanthaler, who will lead you through this conference. Please go ahead.

Welcome. This is Werner speaking from Evotec. Welcome to our 2019 reporting opening new doors. As always, you can find the supporting slides for this conference call on the web. I’m here together with my team, our CFO, Enno Spillner; our COO, Craig Johnstone; and our CSO, Cord Dohrmann. We all in separate locations and all in best health and fully active for the company, as all sites of Evotec are fully active. And you go to Page #3 of this presentation, you see hashtag research never stops now more than ever. So before we look back in the back mirror for 2019 and before we look forward into the short and long-term future of Evotec, let me bring you into the Now, and with this into of why Evotec exists. For more than 3,000 coworkers, research never stops as long as there are more than 6,000 untreatable diseases on this planet. With COVID-19, only one of the hundreds of viruses shows us why innovation and access to effective prophylactic and therapeutic medicines for all is key for global society. In the last weeks, Evotec in accordance with the relevant national guidelines, has come together on the four clearly defined principles. Protect. First, protect yourselves. And with this, protect everyone else. With this, we hope that also you and your firms and your families are healthy and stay healthy. Respect. Respect the fact about this pandemic, but also respect the attitude and behavior of every individual, who is living with you in the society right now. Stay focused. We, as a company that is essential to fight diseases has come together to fight this disease as many other diseases. With this, we try to stay focused within our core competencies, and most importantly, we try to stay open. Our focus includes, for the last years already, infectious diseases in virology, which is a key to fight this crisis. Help. Never let a serious crisis go to waste. In this period, COVID-19 is also an opportunity to do things and to think about things that were not in our core business before. Here’s just a few small examples of the many things that Evotec does and our employees have started to help other people in our environment. For example, we are supporting local testing initiatives of hospitals around us, we have opened our infrastructure for people around us and, of course, this is only a site activity next to our brilliant research that we are doing. And these are the moments that make me very thankful and humbled to see how brilliantly our employees work to fight diseases. When written in Chinese, the word crisis is composed of two characters. One character represents danger, the other character represents opportunity. This is also how we approach this topic now. And with this, let me bring you into the opportunities that we see for us in our business, because the opportunities and responsibilities are bigger than ever before, when you look forward for Evotec. With this if you go to Page #5 of this presentation, it says it’s just the beginning and we are opening more doors than ever before. Let us just briefly look back into a record year in all dimensions of Evotec. 2019 marks another year of multiple highlights and only very few low lights that illustrate why our mission is just at the beginning. Both segments, and Craig and Cord will bring you into this, are running and performing at full swing. On Page #6, it shows you that we are working a long-term and consistent strategy. This is what our business is built on. We are currently in the middle of the so-called Action Plan 2022. And we feel very comfortable, along this Action Plan, which we have started in 2017 in all the goals that we have set for ourselves. Creating the leading external innovation platform on all modalities is the key element of this phase of our corporate evolution. Our jumpstart into biologics and our significant scale up in cells therapies clearly marks here some very important key milestones along the strategy. And you can be certain that we are fully aware of the importance of, for example, gene therapy or antisense in this context to become the truly multimodality platform for the industry. If you go to Page #7, a multimodality platform multiplies optionality for our business model. Next to building and expanding our excellent fee for service platform, we are accelerating with our very focused first-in-class R&D investments, the creation of a very large pool of co-owned opportunities. Also here, 2019 shows fantastic progress and allowed us to come to critical mass with many positive portfolio effects, with the more than 100 co-owned assets that we show right now. Page #8 translates our strategy into numbers. And despite COVID-19 uncertainties, our strategy is on track. The translation of our strategy numbers into more than 300 million in cash show you that we are in a strong position. Yes, I think it is fair to say that even despite massive global challenges, we are in a very strong position. The megatrend of external innovation is fully active and our leadership role will become even more visible in the next years. Also for 2020, despite several one-time effects and, of course, the COVID-19 challenges, we see a strong year ahead of us. Only external reasons, such as potential ongoing pandemic threats and pandemic interferences can temporarily slowdown Evotec, but nothing can stop us in the long run. If you go to Page #9, you see scientific excellence meeting operational excellence on our platforms. And when we say opening doors, it really means that opening doors for the 500 new top talents that we have recruited in 2019 is key for our long-term strategy. The recruitment of 500 talents into Evotec is a key building block behind our long-term business plan, and we were very happy to achieve this in 2019. The mix of good retention and very good success in recruiting is important for our long-term goals. Of course, also here, we see currently slight delays, but we consider this as a manageable task once the current challenges are over. With this, let me also here thank you very much for following Evotec. And let me guide you into the details of our full-year 2019 reporting by handing over to Enno.

Yes, and pleasure to do so. Thank you very much, Werner, and good afternoon or good morning, everyone, from my side as well. I now have the great pleasure to guide you through our very successful 2019 full-year financials. All three elements of our – and I’m – okay, I’m referring to Page 11 now. All three elements of our external guidance, namely group revenues, unpartnered R&D, as well as the adjusted EBITDA were well achieved, indicating that we once again have realized a further strong year of growth even significantly better than initially anticipated. In this context, I would like to remind you that we have upgraded our guidance with regards to revenues and adjusted EBITDA and two times during the course of 2019 due to better-than-expected business development. Significant milestone achievements confirmed in very late December, led us to further increase our profitability guidance in January 2020 to more than 25% growth in our updated guidance. As you can see on Page 12, Evotec continued its very strong performance from the previous years in 2019, and we can report record numbers for the full financial year. Revenues and adjusted EBITDA are both exceeding our initial budget. And these numbers confirm Evotec’s broad growth across units – all units and all segments. Revenues increased by €71 million, or 19%, respectively, to €446 million, compared to 2018. Good base business growth, in general, with a particular strong growth contribution from our side in Toulouse, significant and higher-than-expected milestone achievements and contributions from Just – Evotec Biologics of 16 point – €16 million for the second-half of the year were the main pillar of the good growth mix. This significant growth was achieved at a stable gross margin of 29.8%. And also to be clear here, the change in accounting regulations, namely introducing IFRS 15 does not play a significant role in this comparison here, as the €375 million top line from 2018 contains already the IFRS 15 impact for a better year-on-year comparison. R&D expenses increased forecasted to more than €58 million on the consolidated level, thereof unpartnered R&D expenses amounted to €37.5 million, which was the previous year €22.8 million, so also here a very significant step up. Our partnered R&D expenses amounted to €20.9 million, the later being reimbursed predominantly by our partner, Sanofi, for our ID Lyon activities under the P&L line other operating income. The increase in SG&A expenses to €66.5 million were mainly based on the overall organic and strategic company growth. Encompassing staff increase to cover the overall growth, during the first full-year cycle with Lyon ID, as a reminder, in 2018, it was only half year, adding a first-half year of Just – Biologics, upgrading our systems, consultancy fees and context of acquired companies like Just – Evotec Biologics, engagements in the field of equity, and last but not least, our financing transaction. So a whole mix of reasons for the increase of SG&A. An impairment of €11.9 million had to be recorded in Q2 2019 for the program SGM-1019 after the termination of the respective clinical development by our partner, Second Genome. The other operating income increased from €47 million to €66.6 million, mainly due to the just mentioned reimbursement of partnered R&D expenses relating to our ID Lyon activities. Another important impact within this P&L line came from our R&D tax credits, which amounted to €28.5 million and increased in line with the growth of our business, originating from France, Italy and from the UK. The operating income decreased by €14.9 million compared to the previous year 2018, and two one-off effects have to be mentioned in this context, which explain this reduction. In 2019, higher impairment charges in the amount of net €7.5 million were recorded and 2018 included also a positive one-off income from bargain purchase of €15.4 million related to the acquisition of our ID Lyon activities. In consequence, the adjusted EBITDA increased very successfully by 29% to €123.1 million. This number was also positively impacted by the new accounting rules, IFRS 16, referencing to operating leases, and this new rule was implemented from January 2019 onwards and amounting to €15.5 million in 2019. Excluding the IFRS 16 effect, the adjusted EBITDA would have amounted to €109 million and increased by €13.6 million, or 14% compared to the full-year of 2019 to the – due to the strong top line growth. The net result decreased from €84.1 million in 2018 to €37.2 million in 2019. And this number is not like-for-like really well comparable to last year due to the before mentioned one-off effects, deferred taxes and the expansion of our equity or Evotec equity strategy and adding further losses below the EBITDA line. All this consolidating more losses under the EBITDA line. Let’s take a look at both segments on Page 13. The segment P&L underline, again, the very strong performance in both segments, as mentioned before, confirming that we experienced a broad and very solid growth across the whole Evotec Group. Execute revenues increased by €73 million, or 21% to €420 million versus previous year, mainly due to good growth in the base business and again, adding Just – Evotec Biologics. Total Execute revenues include its intersegment revenues of €82.7 million. With increased efficiency, high utilization and focused cost management, as well as the impact from IFRS 16, the adjusted EBITDA improved even by 41% to €122.5 millions. Looking at the Innovate revenues, these grow significantly by 37% to €94.3 million. And the increased R&D investments in both partnered and unpartnered R&D reflect our very strong commitment into our co-owned strategy and long-term value generation and sustainability. In total, we invested close to €60 million in R&D, as mentioned before. And compared to 2018, this represents an increase of 64% and that’s a record investment into R&D, which started to generate significant returns during the past years already, as you can see from the growing milestone contribution and revenue growth, but also hubs building very significant upside potential for the future. Despite these significant R&D investments, the adjusted EBITDA was once again slightly positive with €0.6 million. That said, short-term, it is not our major intent to make the Innovate segment highly profitable immediately, but to really secure significant investment into innovation, meaning, existing and new first-in-class products – product candidates, as well as paradigm shifting platforms. Page 14 is the view of our – at our very well performing fourth quarter. And, in particular, looking at our top line, Q4 was an outstanding quarter with €125.1 million of group revenues. Revenues include very significant milestone achievements from Evotec Innovate and a growing base business, including contribution from our latest acquisition, Just – Biologics. The adjusted EBITDA in Q4 increased by 12% to €29.9 million, showing a very strong adjusted EBITDA margin of almost 24%. And with this, I would like to hand over to my colleagues, Craig and Cord, who will guide you through the operational and scientific performance of Evotec. So thank you all. And over to Craig.

Thank you, Enno, and good afternoon to everyone on the call. I’m very pleased to take you through some of the highlights of the operational performance of 2019. The Autobahn on Page 16 represents our fully integrated platform, the highest-quality infrastructure on which all of our projects and activities run, both Execute and Innovate projects, as well as Academic BRIDGEs. All of these projects benefit from the expertise of the teams, the economies of scale and capacity, and the investments in technologies, which are integrated and coordinated together, drive the project to the highest speed and the highest probability of success, smoothing out the inevitable scientific bumps in the road and achieving the best progress towards the destination, effective safe medicines for patients. In 2019, we added a whole new lane to the highway with the acquisition of Just – Evotec Biologics, making our Autobahn truly multimodality and opening doors into a whole new range of scientific opportunities for our partners under our Innovate pipeline. Moving on to Page 17, one of the philosophies firmly embedded at the heart of Just – Evotec Biologics and which resonated so strongly for us was the idea that the real value and integration was optimized with a horizontal view of the innovative process, working towards a clear vision of the future therapeutic content right from the start, and through interdisciplinary work, solving problems at every stage. Intellectual property and advanced step are built through creative interdisciplinary problem solving. And through expert input from the most relevant team members at each stage in the project, combined with cutting edge, predictive science and computational power, we have the best chance of solving problems and creating success throughout the drug discovery and development process. With Page 18, I’d like to pick out some of the highlights of 2019 in the Execute segment. Notably, all the business areas and functions showed growth compared to 2018. And taken together, Execute delivered the growth of 21% in the year, with a robust gross margin of 26%. We forced new projects and partnerships, such as with Astex, Yale and Takeda. We added new strategic platform capabilities and technologies, such as with the global sample management agreement with Sanofi. And we extended many of our existing integrated discovery and development partnerships, such as STORM Enterprise, Aeovian and Dermira, all with a very high return rate of customers. On Page 19, I come to one of our major events in 2019. The acquisition of Just – Evotec Biologics. The philosophical core was and still is the fully integrated horizontal version of biologics discovery, development and manufacture to create more affordable, wider access of these very important medicines. The scientific core is the application of a proprietary machine learning-based predictive tool called, Abacus, to improve design and selection of antibodies for more cost-effective development and processing. Moving on to Page 20, we look to the future of manufacturing of antibodies. And we believe that the future of antibodies will be towards smaller, more flexible, and less capital-intensive infrastructures. Why? Because we anticipate that biologics products are going to be more targeted, more personalized, and applied in more areas of more novel biology, such that the bulk demand for each new molecule in clinical development may be lower and will probably be less predictable. In addition, since the product and the process are so intimately linked, and Just – Evotec Biologics represents a fully integrated vision of biologics discovery and development, we embarked upon the construction of the facility of the future in 2019. And I’m excited to share with you on Page 21, an up-to-date image of the site. We were also delighted to say in our first partnership with Merck Sharp & Dohme and have already engaged with the FDA to prepare well in advance for this innovative facility to come online during 2021. So on Page 22, I draw this section to a close by sharing that we continue on the same very positive trajectory, perhaps slightly slowed down due to the current global climate. But nevertheless, throughout 2020, and most importantly, in the long run, we’ll look forward to bringing you news of new alliances and partnerships and indeed further extensions of our platform capabilities in future calls and announcements. With that, I’ll hand over to Cord.

Thank you, Craig, and good morning, good afternoon to everybody on the call. It’s my great pleasure to summarize the achievements of our Evotec Innovate business segment in 2019. Evotec Innovate continues to build enormous financial upside for Evotec through investments in proprietary drug discovery. These investments form the foundation of strategic partnerships, the pharma companies and our spin-off companies. Both our strategic pharma partnerships, as well as our spin-off companies then contribute to the expansion of our co-owned product pipeline. 2019 was a truly exceptional year for Evotec Innovate financially, as well as scientifically. Overall, 2019 was clearly the most successful year since its inception in 2010. This is not only true in terms of revenue growth, but also in terms of scientific milestone achievements. Let me briefly illustrate again the financial achievements. In 2019. Evotec Innovate posted record revenues of close to €95 million. Compared to 2018, this represents an increase of about 37% base purely on organic growth. Scientific milestones contributed close to €40 million, which are also more than ever before. Furthermore, despite yet another very significant increase in R&D investments, Evotec Innovate continues to maintain a positive EBITDA. In 2019, Evotec Innovate invested close to €65 million into R&D. Compared to 2018, this represents an increase of over 60%, and thus more than the ever invested into R&D on an annual basis. The financial performance, combined with the accompanying co-owned pipeline buildings, further confirms that our R&D investments are highly successful. Through our Evotec Innovate revenues alone, we continue to cover our costs of R&D. Meanwhile, we – while we’re creating a constantly growing pipeline of co-owned product opportunities, which have a huge financial upside for Evotec. Per co-owned drug product, this upside is generally in the order of €100 million to €200 million in Texas-based milestones, plus potential royalties that reach from solid single-digit royalty rates into the double digits. On the scientific side, we have made similar fantastic progress. The pipeline of co-owned drug product opportunities keeps maturing. More and more product opportunities keep moving into the clinic. So the more clinical-stage projects are starting to deliver exciting clinical data in patients. Moreover, preclinical-stage discovery projects are also moving forward and are entering formal preclinical development, often associated with very significant milestone payments. At the same time, we continue to build spin-out companies. Combined two of our spin-out companies called, Breakpoint an NephThera, raised about €55 million in financing last year. Both companies are solely based on Evotec Innovate R&D projects and Evotec employees. Both companies formations belong to the most successful early-stage company formations in Europe in 2019. Furthermore, we continued to invest into R&D. These investments focus either on individual drug discovery projects in core Evotec disease areas, or highly differentiated drug discovery platforms, such as our iPSC platform. The platform investments include investment into building patient databases, which deliver novel drug discovery starting points, as well as patient stratification opportunities during clinical development. Last but not least, we stay committed to infectious disease. The reasons here are probably more obvious today than ever before. We have built a number of partnerships, in particular, in the antimicrobial field, but we are also working on various antiviral projects, including now also the support of SARS-CoV-2 initiatives. We are committed to contribute whatever we can to help manage this crisis and are working with colleagues in the pharma industry to do this efficiently and effectively. The two next slides gives you an update on our co-owned pipeline. Our co-owned pipeline continues to grow and mature. We will not be able to take you through all these achievements in 2019, but we only want to mention a few highlights. I’m starting with our clinical-stage pipeline on Page 24. The most important progress we achieved in our collaboration with Bayer. Here, our lead project generated highly promising Phase II clinical results in chronic cough. Although the primary focus of the collaboration with Bayer was and still is on endometriosis. Early on, it was clear that our lead program showed significant promise in another – in a number of other indications, which included also chronic cough. In this slide, Bayer pursued this opportunity together with us as soon as possible. The project is based on an ion channel target called P2X3. The P2X3 project was brought into the collaboration originally by Evotec. Elite drug candidate, Bayer 1817080 was advanced into a Phase II proof-of-concept study for the treatment of refractory chronic cough. And in this study, Bayer 1817080 exhibited a promising efficacy and safety profile, clearly meeting the primary endpoint. Together with our partner, Bayer, we are very excited about the prospects of further clinical development in chronic cough, as well as a number of additional indications. A Phase II/III study in chronic cough is expected to start within the next 12 months. I also wanted to mention a couple of highlights from our preclinical-stage pipeline. Here, I would like to mention, in particular, our spin-out company, Topas Therapeutics and our neurodegeneration collaboration with BMS. Some of you may remember that Topas Therapeutics was spun out of Evotec in 2016. The company was focused on the development of tolerance inducing antigens through the delivery of nanoparticle conjugates. Tolerance induction is one of the most exciting mechanisms in the field of autoimmune diseases, as it has potential to generate a cure. Topas, nanoparticle platform, could highly affect us in multiple autoimmune diseases. This, of course, depends on the delivery of disease-specific antigens. The first drug candidate of Topas, TPM203, entered a Phase I trial for the treatment of Pemphigus Vulgaris at the end of 2018. The Phase I trial is an open-label study, designed to evaluate safety, tolerability, and also pharmacokinetics of TPM203. However, the study will also explore early signs of effectiveness of TPM203 to induce antigen-specific immune tolerance in patients suffering from Pemphigus Vulgaris. Regarding our preclinical stage drug candidate pipeline, here, we added another candidate to our neurodegeneration collaboration with BMS/Celgene. At the end of 2018, we identified a preclinical development candidate for which we initiated preclinical drug profiling and development activities. According to our current plans, this candidate is expected to enter clinical development in 2021. Overall, our neurodegeneration collaboration to BMS/Celgene has been highly successful. We continue to make progress on quite a number of projects, which is also reflected in various milestone payments we achieved during 2019. But most importantly, BMS/Celgene decided to exercise its option to extend the neurodegeneration collaboration early for two more years. This extension secures the collaboration until the end of 2022, based on a US$30 million milestone payment. Finally, I would like to mention a few highlights from our discovery stage pipeline. Although we added a number of drug discovery collaborations over the course of the year, we are clearly very excited about yet another collaboration with Bayer. In contrast, the first two collaborations, which are focused on endometriosis and kidney, respectively, this new collaboration will focus on polycystic ovary syndrome. This collaboration is based on the partnership we initiated with Celmatics. Celmatics has built a unique patient database in the field of women’s health, including polycystic ovary syndrome, which is expected to deliver a new drug discovery starting points, based on the most comprehensive women’s health patient-based database currently available. Finally, a couple of highlights regarding the expansion of the discovery stage pipeline on Page 25. In 2020 – 2019, we spun out two companies solely based on Evotec Innovate drug discovery projects and Evotec scientists. One company called, Breakpoint, is focused on developing novel oncology treatments based on mechanisms targeting DNA damage repair. This company was co-financed by Medicxi and Taiho Ventures with a Series A round of €30 million. Similarly, we build a company with Vifor Pharma called, NephThera. This company is focused on developing novel treatments for chronic kidney disease in a space on our patient database, generated from about 5,000 kidney disease patients. This collaboration was financed by our partner, Vifor Pharma, through a Series A financing of €25 million. In Breakpoint, as well as in NephThera, Evotec maintains an equity stake of close to 50% currently. With this, I’m moving on to Page 26 to briefly discuss our progress on building Academic BRIDGEs. Our first BRIDGE, LAB282 with Oxford University, has been highly productive and very successful and become the blueprint for a number of additional BRIDGEs, which is illustrated with a growing portfolio currently building and – that we’re currently building Europe, [indiscernible] and North America. On Page 27, I would like to give a brief update on our equity strategy. Once again, 2019 has been a very successful year with a number of follow-up financing and also new investments. Here are only a few highlights. One example is Immunitas, a company spun out by Kai Wucherpfennig, Mario Suva and Dane Wittrup, who are all faculty members at Harvard Medical School, Massachusetts General Hospital and MIT, respectively. All of them are highly accomplished scientists in the field of immuno-oncology and protein engineering. The company is backed by highly successful venture capitalist, such as Longwood Fund, Bayer Leaps Venture Investment Program, and the Novartis Venture Fund. We are very excited to be part of this group, which successfully raised US$39 million for a Series A round. Moreover, there are also significant scientific and corporate progress within the Fibrocor, Facio, Exscientia, Aeovian and Forge. Most recently, Forge signed a license and collaboration agreement with Roche in the area of infectious diseases, specifically, Forge’s antibiotic programs. Forge is eligible to receive over €190 million in total payments plus royalties. So overall, we feel that the equity portfolio is making great progress and we’re very excited about it. Looking ahead on Page 28. 2020 has started very well for us. And without going into any details, you can expect that many more scientific doors will be opened with our lead drug discovery and technology platforms. This concludes our overview of Evotec Innovate. And I will hand back to Werner.

Thank you so much. Before coming to our guidance, let me tell you how much we would love to see you in person in New York City at our R&D Day. Having said that, given the circumstances we have to postpone this, because we have discussed internally, it makes much more sense to have this in person than just a short technical call, because it will not give you the full flavor of the power of our fantastic assets that are coming through our pipeline. But to trust us in the meantime, you will see a lot of new flow coming from our Innovate pipeline and our multimodality approach to drug discovery and development. If you would like to follow me to conclude to Page 31, yes, it was a great year, 2019, and yes, there is a strong year ahead of us, where we have to master several challenges and one that we all did not foresee, called COVID-19. Given the current global insecurities surrounding COVID-19 and possible future disruptions from our partners and also our own business environment, we look into our guidance very carefully for 2020 and have assessed more quickly than probably in previous years, the potential impact on our business and that’s also the reason why the current guidance is relatively broad. In 2020, the total group revenues are expected to range somewhere between €440 million to €480 million. This anticipated revenue growth is based on the visibility of the current order book, expected new contract, contract extensions and milestone opportunities. On the other side, please bear in mind that the 2020 specific loss of the Sanofi Toulouse subsidy, which was discussed several times, is also factored into this guidance. Evotec’s adjusted EBITDA is expected to be in the range of €100 million to €120 million, despite increased R&D investment, the expected loss of the subsidy from Sanofi and the significant ramping up of Just – Evotec Biologics business by investing into our highly innovative J.POD capacities. As in previous years, we will continue to significantly invest in our own unpartnered research and development activities to continue, create and create an even broader and bigger long-term pipeline to first-in-class assets going forward. Here, we expect around €14 million in spending in 2020. With this, you get a great overview of what we have done in 2019 and what you can expect from us in 2020. And with this, we want to, in these times, especially also thank you for following Evotec, not only in the short run, but in the long run, and we want to make sure that you have a company that is mastering all challenges together with you. With this, let me hand back to the operator and invite you for questions for this conference call.

The first question comes from the line of Joseph Hedden, Rx Securities. Your line is open. Please go ahead.

Good afternoon, and congrats on strong full-year 2019, and thanks for taking my questions. So Q4 milestones had a very strong performance, and I know that a few of these have been disclosed. But could you possibly provide any further details on how you reached that number? And then, do you see 2019 is a particularly strong year for milestone income or – because of the significantly expanding number of collaborations? Is this kind of a new normal level? And then I just wanted to ask on Just Bio €16.1 million revenues on the half. So if we take that as a kind of €32 million-ish for the full-year, if it was a full-year. Is – that – some – that was your previously – is that in line with previously stated expectations? And is just EBITDA was going to be EBITDA neutral in 2019, was this the case? And what do you expect for 2020? Sorry, if the last one didn’t quite make sense.

Thanks, Joseph. We’ll answer as the questions come. On the milestones, I think, it is fair to say that 2019, particularly Q4 was very, very strong, comes from a portfolio of several – also smaller milestones from, for example, Bayer, Sanofi, BMS, but the major driver was clearly our neurodegeneration platform based on our iPSC platform, which delivered outstanding results through the whole year, but also very visible then in Q4. Is this new normal of our milestone level? I think, here, we should be all be prudent by understanding that milestones cannot be predicted, because they are driven by biological events. But what is a new normal is that, the portfolio of optionality of milestone is getting broader and deeper and more advanced going forward. I think, with this, we’re very confident here into 2020, 2021, 2023 when until – on top of the milestones, you will also see royalties coming in, in the long run of our business plan. When it comes to Just, I would like to hand over to Craig.

Thanks, Werner, and thanks for the question, Joseph. In terms of gating you for Just, yes, I think the half year of €16 million is a good gauge for what we are hoping to achieve in 2020, subject to the uncertainty that we’ve just announced, along with the guidance for the year. In terms of EBITDA, it came in approximately neutral in 2019, and we expect that obviously to develop into a positive EBITDA in 2020.

Okay. Thanks very much, both. Thank you.

Next question, please?

Thank you. The next question – yes, the next question comes from the line of Chouhan Naresh, Intron Health. Your line is now open. Please go ahead.

Hi there. It’s Naresh Chouhan from Intron Health. Thanks for taking my questions. Firstly, Werner, you spoke about opportunities in this new environment. And one of them potentially could be – we’re seeing in other industries, people looking for more local suppliers. And on top of that, we’ve seen – I’ve spoken some biotechs who have suggested that they are worried about IP risk with using some of your competitors in Asia. Are you seeing increased demand or increased inquiries from customers who may have previously used Asian customers in executing? That’s the first question. And secondly, as milestones, milestones clearly become a bigger part of the business. What’s not clear, but would makes sense and would be helpful to get some color on this is, presumably, you’ve been adding new contracts. And those new contracts are potentially bigger in average size in scope, and potentially in profitability, just some color around how those Innovate contracts are – or new alliances are evolving in terms from a financial perspective? And thirdly, on – also on kind of milestone for this year, we think clinical trials being disrupted. Now you don’t expect, which kind of milestones would potentially be hit this year? But is there a risk to milestones this year from being delayed into 2021 potentially or later for any disruption? Ad the final question is, can you give us a sense of the value of the equity portfolio? It sounds like some quite interesting stuff in there. But trying to quantify that would be very helpful? Thanks.

First question, I will hand over to Craig; second question will go to Cord; third question milestones for this year hit by delays, I will take in the equity portfolio; I will then hand over to Enno. Let me start by the third question for delayed clinical trials of this year. Yes, we see it in the industry that many of the large pharma companies have already announced, for example, Lilly, that some of the clinical trials will not be recruited as fast as they were originally thought. Here, keep in mind that our medicine portfolio is composed of two elements. One element is preclinical and discovery milestones and the other milestones are clinical milestones. The majority of the milestones we expect are from discovery and preclinical advancements. So here, a lot of the progress is in our own hands. And therefore, here, as long as we can fully operate, and as long as we have access to capacity, the impact should be minimal. For clinical progress, I think, here, the major advancement that we expect is from Bayer in P2X3, where, I think, here, the preparations are ongoing at full speed at Bayer. So therefore, we are quite confident that this clinical trials will go forward and we only expect to see three entry milestone, which might not come in 2020, but might come in 2021. So also hear from this portfolio, the impact seems limited for our current planning. And coming back to IT and Asian customers, may be here, Craig, could give a short flavor on the dynamic that we see?

Sure, no problem. Yes, thanks for the question and you refilled in your question to a new environment. I mean, I think, we also see this new environment, but we feel that we’ve been in this for some years already. This new environment has existed for five or more years, and we feel we are very much a central player in the pulling together called drug discovery and development activities in a very new way, academia, virtual biotech, small, medium, large pharma, all user Autobahn to progress their projects. And what they’re looking for is high-quality, high confidence, high trust and highly effective execution. In terms of – and as I want to comment on other people’s handling of IP. But certainly from our perspective, we feel that we offer a very, very secure and very trustworthy control over partners intellectual property and – at every stage with very high respect and very high control. And as a result, then I think our partner will see not just excellence and technical ability, but they also have a high-level of trust in what we do.

And I think to add on this before I hand over to Cord, having manufacturing capacities available in the United States, what we are building was Just – Evotec Biologics will be a key component of the future supply chains of many of our partners like you have seen already with Merck Sharp & Dohme taking the option for part of the capacity that we’re building there. Craig, maybe you – Cord, maybe you can give a little illustration of how an Innovate contract is composed.

Sure. So generally, Innovate contracts have – most of them have in common that we are asking for upfront payments to access programs or licenses to programs. On top of that, we have significant usually research payments, as we bring our teams here into usually collaborative efforts for discovery efforts. And on top of that, then there are very significant milestones and royalty payments. The royalty payments – the milestone payments are usually on the order of €100 million to ₹200 million in terms of early discovery, preclinical, clinical and development milestones, but also commercial milestones. And the royalties are usually in the range of solid single digits to – into the double digits royalty rates. Some of these contracts are direct licenses and some of them are option-based, where we essentially do all the discovery work, development work and our partner then can opt-in. And the opt-in points usually are preclinical development candidate or IND at this stage.

And maybe to add one sentence here. Of course, the dimension of Innovate contract is typically depending on the uniqueness of the science that we bring into these context here, as we only tried to work on first-in-class targets, the uniqueness is very high. And secondly, of course, more competition for unique assets is increasing the value of these assets. And the third aspect maybe is, given the completeness of our platform, we can progress Innovate assets for more or less as long as we want, as long as we can afford that. And secondly, as our platform is available to Execute, these projects, which makes us, I would say, quite independent from short-term deal necessities that many other typically smaller biotech companies are facing. Maybe last comment, Enno, if you can briefly comment on the equity portfolio how it’s composed/

Yes, absolutely. I mean, clearly consisting out of 14 companies that we have assembled in our equity portfolio, consolidated at equity or just normal consolidation, all of them being minor shareholdings, everything between 4% and 50%. We don’t have evaluation published for the whole portfolio of similarities out of this. But I can tell you that over the past years in total, we have so far invested in equity about €52 million on the existing portfolio. And currently, if you look into our notes as well, you will recognize that despite only linear amortization took place no extra ordinary rents with this regard. So this is an obviously also a minimum threshold from the market valuation that we have.

Thank you. Next question, please?

Thank you. The next question comes from the line of Falko Friedrichs, Deutsche Bank. Your line is now open. Please go ahead.

Good afternoon. It’s Falko Friedrichs from Deutsche Bank. I would have three questions, please. Firstly, can you elaborate a bit more on the potential coronavirus effect to your business? You mentioned that all facilities are still up and running. But are you noticing any less demand from your customers currently? And are your supply chains affected in any way and to date? And then secondly, on CapEx? Can you give us an indication for what you intend to spend this year? And what are the returns you are typically expecting for CapEx investments into the Just – Biologics business? And then thirdly, can you give us a quick refresh on your current debt situation in terms of what covenants you have, and how much you could eventually draw from credit facilities if required?

Thank you very much. Question two will go to Enno, question three will go to Enno. Let me comment on your coronavirus question. So first of all, we see certainly an impact on our supply chains as many other businesses also do it, especially, for example, on raw materials that we are bringing into our business from our suppliers, for example, for chemicals, for example, for other experiments that we are studying. But so far, given a very conscious built of our supply chain, we have not experienced here major disruptions. And only I would say minor delays, which we think we can compensate over the coming quarters. When it comes to the part of less demand, I think, the last 14 days are kind of a shock situation for many people out there, including also, of course, our business. So it’s probably too early to have here full visibility of what this will mean going forward. One thing is clear on our side, there has been no termination of any contract so far on Evotec because of the changed situation around COVID. On the contrary, we see certain people who wants to make additional contracts with Evotec at this stage. But here, we have another limitation, which we have to share with you, which is that given the current situation, not all our capacities, can be brought to full effectiveness on the platform, because, of course, we follow national guidelines when it comes to how many people can we have in the lab, how close can people be in working together end-to-end? And so I think here, it’s a situation where too early to tell the whole impact, but overall, under control. But, of course, we also don’t want to hold back that there will be impact on our business going forward. But it’s a bit too early to give this a full, I would say, quantitative dimension at this stage. With this on question two, back to Enno and same for three.

Yes, pleasure taking this question. Welcome, Falko. So first of all, with regard to the CapEx, I think in 2020, we will have a little bit of a special year, as we have our normal CapEx was – which will be slightly above what we saw in 2018. But not significantly, which means in translation €30 million to €35 million and “normal CapEx.” Normal CapEx means expansion of our side supporting our growth story, but also exchanging equipment that is aged, that is not up to date anymore and then also repair and maintenance. That is all in there. Within this field, if it’s bigger investments, which go beyond a couple of hundred thousand or into 1 million per project, then we do an internal ROI investment, but there’s not a defined threshold here in terms of a fixed number. But we have to understand that this contributes positively to our overall margin and brings the return within the rather ideally short time of period we should not be too long suggested couple of years, obviously, in the max. With regard to Just, we will have a total of the range of €100 million to €110 million investment over a time period of three years. We have already started in the fall of 2019. So here, we will see the major portion of this CapEx in 2020. So that we should have a total of the combination of normal CapEx in Just see a total CapEx of north of €100 million in 2020. Again, clearly, just this year, a special situation, which then will slowdown in 2021 when we switch into operational motors with the J.POD. With regard to covenants, honestly, we – despite having quite a few contracts on the debit side, we don’t have any significant covenants with the exemption that once we go beyond net debt leverage of 3.0, then we would step up a few basis points in the interest rate that we have to pay. That’s the major covenants, if you will. We have currently net debt leverage at the end of 2019 of approximately 1.2, including IFRS calculation. If we take out IFRS, it’s even significantly less, which means we have quite a bit of headroom here. If we would have to add additional debt, which is clearly in the range of €200-plus-million, depending on what we obviously do with the money in that regard. And that’s – yes, and that should answer all your questions. Thank you.

Okay. Thanks very much.

Thank you very much. Next question, please?

Thank you. The next question comes from the line of Victoria English, Evernow Publishing. Your line is now open. Please go ahead.

Yes. Werner, you gave us at least three interesting examples of spin-out companies. And I’m wondering what your aspiration is over the longer-term for these companies? Are they a vehicle for bringing in new proprietary products into your portfolio, or are they capital returns type of options? That’s the first question. And the second question is about the corona of COVID-19. Are you working with anyone or just on your own looking at using AI to repurpose some existing drugs that could potentially treat this disease?

So when it comes to the spin-out company strategy, I will hand over to Cord. When it comes to repurposing, just to give you here a color of what we’re doing without going too deep. We are pooling some of the former players on our platform to start repurposing activities. And, of course, we are using all potential technologies that are available in a high, high, high tech drug discovery development environment to find here next-generation possible ways for repurposing. Having said that, if you think about COVID-19, this is more a long-term idea of optimizing here the fight against viruses in the short run. I think, everyone is hoping to have existing drugs that pop-up that we can either use in a different way or in combination of different ways at this stage. With this, Cord, if you can comment on the spin-out strategy?

Sure. Thanks for the questions. So the – our spin-out strategy really is fairly simple. Through our spin-out through development or bringing the spin-out companies forward, we have the opportunity to develop Evotec R&D projects, all the way to human proof-of-concept. And we can do this while we are maintaining an equity stake in these companies and therefore also a stake in the project, of course, that is actually usually significantly higher than your average royalty rate that we achieved through the strategic partnerships at an earlier stage. So we view this as really an expansion of the Evotec Innovate strategy, bringing projects through the spin-out companies to human proof-of-concept. And therefore, increasing the value while maintaining a much higher stake in them. And on top of that, it’s of course, the – through the spin-outs, we create specific teams that are built around these projects that are perfectly enabled them to focus on the task on bringing these projects forward into the clinic and towards human proof-of-concept and potentially even beyond. The exit strategies could be multifold, could be the larger partnerships where in – through these spin-out companies or also Bios, where we also position them, of course, will also position these, of course. So it’s a – but overall, it’s – the primary goal is just to bring projects further along the value chain and maintain a higher equity stake in these projects.

Thank you.

Thank you. Next question, please?

The next question comes from the line of Patrick Trucchio, Berenberg. Your line is now open. Please go ahead.

Thank you. Good morning and good afternoon. First, just regarding the – actually – sorry, just a follow-up first on the J.POD facility. So first in the context of the COVID-19 outbreak in Washington State, can you speak to the level of confidence that the first phase of the projects will be mechanically complete by the end of 2020, with the validation in the first part of 2021? And then also, secondly, how many partnerships could you enter based on the completion of this first phase of the project? And then finally, how much initial capacity will the facility have? And how quickly can it be scaled up?

Yes, that’s one part of your question. Is the second part of the question as well?

Yes. So these are all around the J.POD facility, and then I just have a follow-up?

Yes, because they will go to Craig. If you wouldn’t mind asking the second part of the question as well as I can better distribute them if that’s okay for you.

Yes, sure.

So just the second part, yes. So the second part just on, sorry, on the COVID-19 and the 2020 guidance. So what I’m wondering about is in terms of the partner to R&D programs, in terms of the Innovate segment, is much of the impacts from COVID-19 occurring because of a delay in clinical trials from your partners there? Or is there perhaps also a negative impact on Execute from the perspective of signing new contracts, if not, from existing contracts? And then in the context also of this COVID-19 pandemic, do you expect Innovate to generate positive EBITDA, adjusted EBITDA in 2020 similar to the way it did in 2019? Thank you.

Thank you so much. On – I think I take the third bullet first, because that’s the fastest, the J.POD question will go to Craig, and the overall R&D Execute guidance will also put forward to Craig. So Evotec Innovate is driven by milestones and milestones are highly unpredictable because of biological events. So therefore, achieving a positive EBITDA in 2020 or not achieving positive EBITDA in 2020 will depend on milestones, which typically have visibility only during the year and they are hard to predict at this stage. But what we can say is that, the portfolio of potential milestones event is growing year-by-year. And what we also want to reiterate, it’s a long-term value-optimizing strategy and not a short-term EBITDA optimizing strategy that we are following within Evotec Innovate. So therefore, if we have a positive EBITDA, it’s great. If we don’t have a positive EBITDA, we are still completely on strategy. That’s how we look at this. What we don’t do also, despite COVID-19 crisis, we don’t slowdown at this stage, if we can bring our R&D investments to the platform any R&D activities, because we’re very convinced about, especially our iPSC platforms, our pandemic [ph] platform, our Paranta platform and other platforms that we’re building in Evotec Innovate. On the J.POD question, I hand back to Craig and also on the current impact that we see on the Execute signing of new contracts.

Sure. Thanks, Werner. In terms of the J.POD construction, you’re absolutely right, Washington State has some specific challenges. But right now, we continue and are continuing with the construction on-time and without deviations. So that’s going very nicely. And then you had some questions about the capacity scale and how the J.POD is structured. I think maybe we need to remind you that the concept behind the J.POD is built on parallel trains of capacity that can be, if you like, constructed rather rapidly and on-demand. So the design paradigm in the J.POD is high flexibility, high agility. And so we are building it to have plenty of capacity for further expansion within the shell. And we’re building it to be operational, as you indicated in 2021 with a starting capacity that we will be able to accommodate a number of projects and partnerships through that. But really, the concept and the philosophy is as new opportunities, new partnerships are struck, then we can, as we call it, skill out, rather than skill up by fully fitting out the infrastructure within the J.POD building. So it’s a very flexible, very dynamic and deliberately so it’s designed that way to be flexible to increase in demand over time. So I hope that I answered the question. And then on COVID-19, as Werner has already said, we’ve tried to give a wide window of guidance, because it is a considerable uncertainty here, as we’ve not seen major impact so far, but we see that there are sensitivities, if you like in the system and interdependencies, we have interdependencies on our suppliers and so on and our partners in some cases. Then it’s really a question of the duration of restrictions rather than a specific threats in any one dimension of our business. So you asked specifically about clinical trials in Innovate or is it Execute? What we are trying to do here is manage a question of uncertainty of full capacity and duration of restrictions. And that’s why we are finding it, I think, difficult to be as precise as who would normally be, but give a much wider window of over an expected corridor of operation this year.

Just to give you an illustrate this by one example. We are, for example, in our Cyprotex operation in Manchester, one of the largest DMPK tox testing companies on the planet, where a lot of early tox testing comes from pharma partners, biotech partners and foundations, where some of these partners currently have just shutdown their operations. Of course, this influences the flow on to the Cyprotex platform. The real question will now be okay, will there be once these institutions open again and catch up and we can then do this with the existing capacity? Or will that just do delays in testing of the compounds that then will go through the system? And I think here we are just illustrating one example of how our network is constructed and where I have to say, our people are doing an excellent job to manage, not only our partner network, but also their internal capacity network extremely well. Next, last question. Thank you.

Pleasure.

Thank you. The last question comes from Ram Selvaraju, H.C. Wainwright. Your line is now open. Please go ahead.

Hi, this is Boobalan dialing in for Ram Selvaraju, and thanks for taking my question. So I would like to ask three questions all at once. The first one is, what is the current status of EVT 201? Is there any hope for our Phase III trial and commercial launch? The second question is about Aeovian Pharmaceuticals. I understand that you have developed your preclinical candidate, that’s an 18 months from a lead mTORC1 inhibitor. Can you enumerate the gating items remaining to enter into human trials? And what are the pending items that are in your responsibility? And what elements are being handled by Aeovian? And the last question, with respect to the Bayer’s compound, the P2X3 antagonist, we believe there are two more competitors in the space BLU-5937 on [indiscernible] compound. BLU-5937, in particular, has produced best-in-class activity and selectivity data. So what are your thoughts and concerns about these competitor molecules? Thank you very much.

With pleasure. If Okay, I will answer all three questions. So on EVT 201, we have information from our partner, Jingxin Pharma in China, which goes back two months now that they are preparing for future clinical trials. If these are then pivotal trials leading to communist nation, we can detect not confirm. But long-term, they plan for commercial – commercialization of this target. Of course, on Aeovian, we are without consulting our partners not in a position to comment on the molecule and the future gating situations of this molecule, because that’s not our policy to do that. And on the third question, I think, you should not only mention two competitors, you should mention three competitors to the P2X3 compound, namely Merck is the first one, Toulouse the Shinobi the third. And I think all three competitors, together with Bayer, are at the end, asking themselves the question for costs and the other indication for the others tastes, side effect profiles that the compounds will deliver. And that’s also something where I will not answer anything that is not coordinated with our partner, Bayer. But we are very confident that Bayer is up to a very, very good strategy here. Sorry for being a bit cryptic, but that’s how he has to handle this question. I’m sure you understand.

With this, let me thank you very much for following our progress of the company. Let me all wish you and your families, your friends and firms, all the best of health in these times. Let me ask you to protect yourself. And with this protect the partners around you and I’m so much looking forward when I can see you all in person. And then have in person discussion by touching each other and discussing very, very lively science and discovery and development focus going forward. All the very best.

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