Evotec SE (EVO) Q4 2021 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. [Operator Instructions] May I now hand you over to Dr. Werner Lanthaler, CEO who will lead you through this conference? Please go ahead.

Thank you. This is Werner from Evotec. Welcome from sunny Hamburg. We have uploaded a presentation to follow this conference call that should help you to go through last year’s events into this year where we say setting the pace. We have uploaded this presentation to the web and you can follow this presentation throughout this event. When you go to Page #2 of this presentation, let me start by not only introducing my team, but first of all, also thanking my team. I am here together with Craig and Cord and our CFO, Enno and it is a great pleasure to make another year together with you and close out another year together with you. And we could close out nothing together if we wouldn’t have a fantastic company together and behind us. So let me also take before we go into content, take this opportunity and thank the whole company wholeheartedly for another fantastic year that we have completed as Evotec in 2021. This year brought us closer to our mission where research would never stop until all diseases can be treated more precisely than they are treated now. We have been shifting gears up in ‘21 to follow our mission stronger than ever. If you go to Page #4 of this presentation, let us first briefly look back into the last year, which marks many highlights, but also some lowlights. But overall, it marks a fantastic year following our long-term strategy, which we call Action Plan 2025, The R&D Autobahn to Cures. Highlights of ‘21 can be marked by multiple new and extended integrated deals. The opening of our J.POD in Redmond, the initiation of our J.POD in Toulouse, very good progress in our co-owned pipeline, which we call Evotec royalty pool, because the long-term mission behind it is to have a co-owned pipeline with royalty inflow to Evotec. We see excellent progress in our induced pluripotent stem cell and protein degradation partnerships, especially with Bristol-Myers Squibb. We see strong clinical developments and many of them are in the making. We see multiple innovative partnerships where Cord will talk about them in the presentation to come. And we see a clear acceleration of our leadership in innovative platforms and technologies that bring probabilities of success up. We launched our E.MPD, which is the largest and highest-quality molecular patient databases on the planet, especially when it comes to selected indications, for example, kidney diseases. We are continuing our strategy on BRIDGEs and we have launched a very important global initiative, which we call PRROTECT for pandemic preparedness. Last but not least, also in the globalization strategy of our company, it was important to also make our mark even bigger in the United States by listing the company on NASDAQ and progressing multiple of our operational venture endeavors out there. Yes. It’s not only about highlights, but accompany the living sculpture where sometimes also things don’t go that well and the discontinuation of the development of Eliapixant, which happened after period end is clearly something that we didn’t expect and which was a lowlight to call out. We also see but that’s something where we are in a good class of everyone in the industry right now, some increased cost for capacity expansion and increased costs for energy and other elements along the supply chain. But overall, the company is in a strong situation. Yes. It’s fair to say we are in a very strong situation. And if you go to Page #5, the strong drive forward and the strong ability to build a unique company is called, at Evotec, Action Plan 25. Let me also here confirm our long-term guidance goals for Action Plan 25 because we see our macro environment truly supporting what we are building into the future. So overall, our strategy from good to great can be called Action Plan 25, and it is fully confirmed with our long-term goals. Page #6 shows you that the drug discovery and drug development hub as we are putting it together is unique and it is setting the pace when it comes to quality and efficiency in many of the processes that we are building. Evotec increasingly is the benchmark in the industry that other companies try to follow. We see this by the best possible innovation platform that we have built. We see this with novel technologies like our leadership in AI and machine learning. We see this with our precision medicine platforms. We see this with more access to more efficient drugs for our partners that we are building. If you go forward to Page #7, you should see that learning curves are happening on our platforms more often than anywhere else. Why is this important? Because that illustrates to you that at Evotec, everyone wins when people are cooperating with us. It’s the shared learning curves that mark our shared economy for R&D. This makes our environment so productive when it comes to sharing not only experiments but also know-how and learning curves in our partnerships. And with this, we see a very clear indication for our strategy not only to be strong, but to even be stronger in the future because there are many tailwinds behind our industry wide strategy. Page #8 illustrates to you that we are, on our strategy, building this R&D Autobahn to Cures, not only on all modalities, but also closer to our partners and closer to the academic centers where we see true innovation happening. Today, we are also reporting to you that at every site where we are currently present, we are expanding our footprint into the future, which marks for you an indication that we see strong growth not only happening in ‘21 but also coming into the next years. Page #9 illustrates to you that a company like ours can only grow if we grow our talents. So it has been an extremely rewarding year for us to see that we can attract top talent that wants to join Evotec and wants to build this company together with us. For the first time, we were able to recruit net more than 600 new employees into the company. This is remarkable. But even more remarkable is that this is more than 30% PhDs out of this new class in 2021 that we were able to recruit. It’s a true scientific powerhouse that we are building, which is unparalleled in its scientific and its know-how power on a global scale. We are very happy that we are continuing this path, and you can expect more than 600 talents to be recruited into Evotec in 202. When it comes to talent, on the next page, you see a series of pictures, which is just illustrating the great expertise that we are able to attract. But nevertheless, let me, first of all, thank all 600 new colleagues in the company that they have joined our mission and that we are very happy together with them. But the Page #10 illustrates to you that, for example, Liz Mortimer joined us to lead our safety efforts in the future, that Valerie joined us to lead heavy capital intense projects; that Matthias Evers will join us as of May 1 as new CBO; that Sundar joined us as an expert in biotherapeutics to lead our quality efforts and strategic efforts within Just-Evotec Biologics as we have hired a series of entrepreneurs and residents for our operational venture strategy like Mirko Scherer; like Dan Mahoney; and like Dara Henry; and that we have hired great expertise in our biologics sales strategy with, for example, Christelle joining us from another place, which was also selling biologics. It’s fantastic to build this company together with you. And on the next page, it’s also fantastic to translate a company with the right strategy into great numbers. Great numbers means for us, not only that we are growing, but that we are growing at the right pace, at the right quality level and especially with the right partners. So, we are very happy to confirm that we have achieved all elements of our guidance in ‘21 and that in ‘21 you also see a great quality of growth behind every single line here. Why is this important? Because a company that aspires to go beyond €1 billion in sales by 25 needs to be built on the right quality of sales going forward. A company that wants to lead R&D has to invest R&D into the right quality of R&D projects. And with this also, long term, create the right quality of EBITDA that we want to bring together. So we feel very comfortable about the balance that we are striking here between investing into the future with R&D and even increased R&D in ‘22, as you will see, but at the same time, building a top growth quality company together here. This is best illustrated by taking the next page, Page #12 and looking a bit into the future. And we are very happy that this will be the 12th year in a row with double-digit growth on the top line, 12th year in a row with double-digit growth in the top line going beyond €700 million up to €720 million as our initial guidance is strong growth with about 15%. Unpartnered R&D will go up higher than ever because we see higher potential of our precision medicine platforms than ever before. With about 30% increase here, we feel very comfortable with these investments. And our adjusted EBITDA with about €105 million to €120 million will be at least stable, if not strongly increasing. A lot of this will depend on milestones that have to be achieved throughout the year. Let me also stress that this is not only a year of strong growth in all traditional lines that we are reporting, but that we are investing more than ever before into our strategic footprint to build the supporting growth platform into the future. So with about €300 million in CapEx that we are spending throughout the whole footprint and into upgrading the organization, we are illustrating our strong belief and the strong demand behind the platform. With this, let me again thank my team, thank the whole company but also thank you following us because it’s a pleasure to hand over now to Enno, who will bring you into our numbers then to put the dialogue forward to Cord and to Craig, and I will come back then later.

Thank you, Werner and also a warm welcome to all of you from my side. The audit of the financials and the results and substance, have been completed. And therefore, regarding content, the audit can be considered complete. However, some extended procedures have to be considered, for example, new reporting format like the 20-F and extended ESEF tagging, including our U.S. documents. And while thoroughness has priority over form and sometimes speed, the ESEF process remains to be completed. And once this is done, the unqualified opinion is planned to be issued. Thus, the full report will be available on April 26 for your download. And there, you will find the same numbers that we present here to you today. But let me start and come to the numbers. The 12-month 2021 numbers show an excellent 23% increase on our revenue line, substantially pushed by the positive development of our base business and by the realization of multiple milestones, in particular in the second half of 2021. The gross margin amounted to 24.5%, slightly lower than last year’s 25%. And this is mainly due to the often mentioned end of the Sanofi subsidy for our site in Toulouse after Q1 2020 and adverse FX effects in 2021. If adjusted for both effects, gross margin year-to-date 2021 and here, in a like-for-like comparison would come in at 25.5% versus 23.8% in 2020. The planned increase in unpartnered R&D expenses by 25%, namely €46 million versus €58 million leads to a 13% growth in overall R&D expenses. This development is especially driven by further enhancing our multiple platforms and continued acceleration of our co-owned pipeline. The increase of 37% in SG&A expenses versus last year is mainly caused by increasing headcount and cost for our secondary NASDAQ U.S. listing Werner was just referring to. This rise in this position generally reflects our continuous growth efforts. And this is, for example, the ramping up of our operational J.POD in the U.S. while initiating our second J.POD in Toulouse already. Further part is about enhancing ongoing integration tasks and ensuring overall growth opportunities across the different sites. The other operating income and expense stands slightly above last year’s level and contains three main components: R&D tax credits and the recharges for ID Lyon as the main positive building blocks. And on the other side and in order to address the risk of a potential dividend interpretation of selected contracts by the tax authorities in context of a declared tax, we have recognized a provision amounting to €2.1 million within this line. All in all, this development results in a slight increase of 1% of this position. With a total of €107.3 million, our adjusted EBITDA lands well within our expectations. And like-for-like, we do recognize an increase of even 18% against the previous year. The net income amounted to €215.5 million and benefits substantially from a very positive one-off effect in the non-operating income resulting from a revaluation of our Exscientia EVOequity engagement due to the successful IPO in September 2021. The next slide depicts our exceptionally strong milestone revenue contributions of €49.5 million in 2021, mainly resulting from our long-standing BMS-Celgene collaborations and the new Takeda collaboration. Our base business grew completely organically by 18% overall, and this despite negative portfolio and unfavorable FX effects. Therefore, our base revenues adjusted for these 2 effects year-on-year even grew 23%. Margin-wise, we arrived within expectations, which also – which was also supported by the successful realization of significant milestones as mentioned before. The slight margin decrease versus last year is triggered by the same effects, namely Sanofi and FX, as just described for the revenue lines, plus additional ramp-up costs for the J.POD U.S. in context of preparing the successful launch. Looking at the year-on-year revenue development, the increase is mainly driven by our very significant 27% organic growth of the business, reflected in €135 million step-up versus the last year. This is another evidence for our continuously high revenue quality coming from a healthy mix of our sustainable repeat business with our long-term partners and strong additional demand for our EVOiR&D offerings. Mostly due to the on average weaker U.S. dollar against the euro in the first 7 months of 2021, revenues were negatively affected by a currency effect of minus €9.2 million. Thus, at constant 2020 FX rates, sales would have been even higher at approximately €627 million. Looking at the 2 segments, both continue to grow and perform well, reflecting a broad basis of our growth – for our growth. Year-to-date, Execute revenues, including intersegment revenues, grew by 20%, coming from €510 million in 12 months 2020. This is further driven by an increasing demand in the integrated offering, or EVOiR&D and a strong demand for our base business. 12-month 2021 Innovate revenues amounted to €147 million, which is an excellent 38% above last year due to continuous high demand for precision medicine reflected by expanding existing as well as several new partnerships and also due to the realization of substantial milestones part, in particular, in Q3 and Q4. Innovate’s total R&D amounted to €81.9 million, which is 17% above last year, underlining our continued investment and commitment into innovation projects and long-term sustainability. A view on the single Q4 results illustrates the accelerated growth we have realized in this particular quarter. The 33% growth in revenues has been pushed by a strong milestone contribution of €21.6 million and a significant step-up in base revenues compared to the 3 previous quarters and last year. And in particular, to be mentioned, just Evotec Biologics and development in the Evotec Execute segment performed. Gross margin comes in at a good 27.8% and even exceeds last year’s already high 26%. R&D expenses grew slightly by 5%, while SG&A expense expanded by 80% to support operational and financial growth and reflecting the cost for our going IPO at NASDAQ. All in all, EBITDA is up 25% versus last year. Net result, however, was negative with minus €31.5 million, which after a very successful IPO of Exscientia Holding in September, resulted mainly from a drop of the respective share price thereafter. A view on the net income bridge shows the huge positive effect in the non-operating result from Exscientia of €225 million and FX movements of roughly €15 million. This was partly offset by consolidated operational net losses from several equity participations in the amount of €16.6 million. And in addition, the review of our equity participations resulted in an impairment of €2 million and fair value adjustments of €11.2 million. On Page 20, I would like to highlight the very positive operating cash flow of €122.2 million. The capital expenditures of €118.9 million comprised mainly the J.POD U.S. and other expansion projects as well as lab equipment underlining the acceleration of Evotec’s overall business growth. In 2021, we invested €22.7 million into new and existing equity investments. Finally, the capital increase with the NASDAQ listing or with the NASDAQ listing in the U.S. in November resulted in net proceeds of €403.1 million. Slide 21 summarizes Evotec’s very solid and sustainable non-P&L related financial KPIs. The balance sheet is going up by significant 53%, mirroring the ongoing dynamic growth of our business and influenced positive – by positive effects such like our U.S. IPO as well as our positive equity portfolio performance. Trade accounts receivable were higher than usual at the balance sheet date due to €40 million of milestones and prepayments outstanding. These invoices were all paid in the meanwhile and will reduce our DSO or days sales outstanding figure for Q1 2022 respectively. In addition, again, following our NASDAQ listing from November 2021, the equity ratio stepped up to a very good 62%, and we can report a net cash position of €494 million. These factors together indicate plenty of headroom and flexibility to further invest into organic and strategic growth. Total liquidity consequently increased to €858.2 million at the end of the year, allowing us to continue planned CapEx investments to support projects such as J.POD Redmond and J.POD Toulouse in Europe as well as general expansion of our capacities across the various sites. Furthermore, EVOequity engagements into new and existing equity holdings are anticipated. Yes. And with this, this completes the financial overview. And I therefore would like to hand over to Craig. Thank you very much.

Thanks, Enno. Good morning, good afternoon to everyone on the call. It’s a pleasure to bring you into some of the scientific and operational details, which underpin the financial results you’ve just heard. Today, in integrated R&D, the sweet spot of performance lies at the intersection of the combination of high-quality data generation, the ability to extract predictive power from that data with AI and ML, and inevitably, there is still very human elements of track record and deep domain knowledge and expertise. And we are continually evolving and developing our core capabilities and technology toolkit to maintain our leading position. An example of this is E.INVENT-AI, our internally developed suite of artificial intelligence and machine learning and experimental cutting-edge molecular design tools, which in the hands of our industry experts, allows us to hit the sweet spot of discovery and development performance over and over again. And the resulting credibility and the track record of success allows us to efficiently drive our growth through the combination of continuing partnerships, expansions of existing relationships and the acquisition of new very high-value partners. Working with Novo Nordisk gene therapy, for example, or establishing an admin work stream with Amgen are good examples of moving into new fields with existing partners. And we’re really delighted to start the first exciting projects with, EQRx, our new partner at the end of 2021. EVOaccess, our Just-Evotec Biologics business continues to make great progress establishing itself as a high-quality partner for the industry as well as a disruptive technology leader. And as you can see on Page 24, J.POD Redmond was opened in 2021 and is already operational under the cGMP, a major achievement for the team there and one of the high points for me in 2021. And in parallel we are progressing our preparations for J.POD Toulouse, which is on track to open in the second half of 2024. These two facilities represent the majority of our substantial multiyear capital investments but are, of course, expected to be major sources of revenue and profitability in due course. On Page 25, if we step back and look at the indicators of business mix and quality, we can see that the number of new partners is growing in line with business growth, thus adding diversity and resilience at the same time. But perhaps the most important metric is that of repeat business. Still holding strong over multiple years at over 90% repeat customers, we believe this is a testament to the quality of the work we do right across the board and a high level of confidence that our partners have in the results that we generate. So as a consequence, we have a strong order book and outlook for 2022, which in turn engenders our own confidence in the investments we’re making to build even more growth opportunities and robustness at our infrastructure with a long-term perspective. And with this, I hand over to Cord to tell you more. Cord?

Thank you, Craig and good morning and good afternoon to everybody on the call. Evotec Innovate had a fantastic 2021. Evotec Innovate achieved a record revenue growth of close to 40%, thereby further accelerating its growth compared to previous years. 2021 is actually the strongest purely organic growth of Evotec Innovate’s segment in its over 10-year history. Despite a significant setback in our co-owned product pipeline with eliapixant, overall, our pipeline of product opportunities continues to advance and mature as you can see on Page 27. At Evotec, we currently have a total of over 220 projects in our pipeline. Each of these projects hold significant upside for Evotec in terms of milestones and royalties or through equity participations. Over 40 of these projects are Evotec owned completely and advance these projects as potential starting points for future pharma partnerships. Overall, this means that the pipeline is stronger and deeper than ever before. The progress in our product pipeline keeps translating into clinical stage product opportunities, as you can see on Page 28. Together with our partners, Evotec currently has 14 molecules in clinical development expected key milestones over the next 12 to 24 months are shown on the left-hand panel of this slide. Without going into any great detail, we would like to highlight that there are multiple value inflection points in terms of Phase 1 and Phase 2 data coming in this time frame. As essentially, all clinic development in – is under the control of our partners, it is difficult to comment on exact time lines for these milestones, but we will certainly will provide updates as the program progress. On the next page, Page 29, I’m coming to some of our key platforms. If you have followed our Capital Markets Day earlier this year, you will recognize this slide. At Evotec, we have been building a precision medicine platform, which combines a patient-centric approach with omics-driven drug discovery. It is our belief that patient-centric and omics-driven drug discovery is very much focused on delivering drug candidates with superior efficacy and safety profiles and these disease drug candidates will have a higher probability of success in the clinic. The key components of this platform, traditional medicine platform are our molecular patient databases. Molecular patient databases are essential for a deep molecular understanding of disease processes and thus the identification of the best possible intervention points. A second component of this platform is our patient-derived iPSC-based drug screening platform. iPSC-derived human disease models, model disease more accurately and enable us to more rigorously test for disease relevance already in the preclinical setting. And the key third component are our PanOmics and PanHunter platforms, which enable us to profile diseases and compound profiles more comprehensively and more precisely using a multi-omics approach. Today, the slide is primarily a reminder of our position medicine platform – that our precision medicine platform is not only increasing the probabilities of success, but they increasingly drive our deal making. We’ve had an excellent start into 2022, signing deals with Lilly and Boehringer Ingelheim, which both carry substantial upside for Evotec. The deal was Lilly was signed on the basis of our molecular patient databases and to deal with Boehringer Ingelheim on the basis of our iPSC drug screening platform. The deal at Boehringer Ingelheim also opens up a new field for Evotec, namely ophthalmology. Here, we will collaborate the Boehringer Ingelheim specifically in the field of age-related macular edema. Furthermore, based on our multimodality platform, we have achieved two key project expansions that are in our BMS neuro collaboration. One is in the field of a novel targeted protein degradation approach to key neurodegeneratives targets. And another one we announced last week here, we have moved an anti-sense-based drug candidate forward into our BMS neurodegeneratives collaboration. So overall, we had an excellent start in 2022 with a number of deals and milestones already achieved. Today, I would like to take a few minutes to highlight once again the potential of our molecular patient databases which I come to on Page 30. We believe that molecular patient data will become increasingly important in defining diseases more accurately on the molecular level and thereby identify more suitable intervention points. We are continuously expanding our molecular patient databases into various diseases, some of which are shown here on Page 30. It is important to point out that without Evotec’s high performance PanOmics platform, we would not be able to generate these molecular data sets at high enough quality and cost effectiveness. And without our AI machine learning-driven PanHunter analysis platform, we would not be able to interpret the data. So, molecular patient databases require more than just access to human samples. On Page 31, you can see that, in particular, our molecular patient databases in kidney diseases have delivered already five key partnerships in the last 5 years. The first partnership we signed with Bayer already in 2016, ‘17, quickly followed by a 50-50 JV with Vifor Pharma, a key player in the kidney disease space. In 2020, we signed yet another deal with Novo Nordisk and in 2021 with a well-funded U.S. biotech company focused on rare kidney diseases, which is called in Chinook Therapeutics. The latest deal – the latest addition is the deal with Lilly, which we signed earlier this year. Lilly has a long-standing interest and tradition in the field of metabolic diseases and also complications of metabolic diseases, including kidney diseases. The deal came with a significant upfront payment as well as about $180 million milestone potential per project plus tiered royalties as well as research payments. This pipeline of deals is a strong indication that molecular patient databases will become increasingly important in the pharma industry, and they highlight the enormous commercial potential for Evotec. At Evotec, we intend to further expand our efforts to build molecular patient databases and thereby further expand our portfolio of next-generation drug discovery programs through strategic pharma partnerships. So we are looking ahead of another fantastic year for Evotec Innovate in 2020. And with this, I’m handing over back to Werner.

Thank you, Craig. Thank you, Cord. Thank you, Enno. If you listen to this, it becomes obvious that we are just at the beginning of what we will do to transform the drug discovery and drug development industry. And when you go to Page 33 of this presentation, one element of doing this is our operational venture strategy. It’s still young, but nevertheless, you can see that we are building a well-diversified portfolio with multiple shots on goal that follow our overall strategy to co-own highly interesting and highly potent assets. When it comes to our strategy, it’s not only about science, transforming science and keeping our mission in the focus of the company. It’s also creating a company that does something that is helping our planet to become even more sustainable than it is. Our company takes action when it comes to ESG, which you see on Page 34. 2 years ago, we made many promises on ESG. Please judge us on our actions. And we are very proud that we are delivering our contribution to do the best that we can in this very important aspect for the planet. If it’s measured, it’s even better. So if you go to Page #34, it is great to see that we are improving our ratings when it comes to ESG, but that’s just a nice side effect. Most important for us is that we see that more than 4,400 people at Evotec are dedicated to science and to do the best for the planet. It has become part of our DNA to think sustainable. When it comes to the future of the company, you will see – and this is just highlighted on Page #35 that we have started strong into 2022. So be prepared that our news flow has just started and will continue. Because when you go to Page 36 of this presentation, you will see that we are setting the pace towards achieving our Action Plan 25 long-term goals. This will result in multiple new partnerships coming from our R&D efficiency platforms. This will result in leveraging our precision medicine platforms into even more co-owned transactions that you have seen, ultimately building the largest royalty pool in the industry. And this will result in an unparalleled technological breakthrough that Just-Evotec Biologics will deliver by showing that fully continuous manufacturing in biologics is transforming costs and impact in this important modality. And if you go to Page #37 of this presentation, let me highlight again that our way from a great strategy to an even better strategy is called Action Plan 2025, which is just at the beginning, where you will see revenues above €1 billion in ‘25, where you will see adjusted EBITDA above €325 million and where you will see us even investing more into unpartnered R&D on a year-by-year basis. And you will see our royalty pool with more than 250 projects coming together that then will deliver next to service income, milestones income, also royalty income into the future. Let me close on Page #38, by thanking you, that it has been always a pleasure to build this company with the team insight, but it’s an even bigger pleasure to build this also with you as our network outside of the company. It is fantastic how you give input and feedback to this company. Let me thank you for this. And with this, I hand back to you for your questions.

[Operator Instructions] And the first question is from James Quigley, Morgan Stanley. Your line is now open.

Thanks for taking my questions. I’ve got two, please. So first of all, the 2022 guidance on EBITDA was a little bit below expectations. But can you give us an overview of the trajectory up to the midterm targets? So what we should expect in the – for the margin. Obviously, the focus is on investing for growth. But how should we think about the trajectory going forward? You’re hiring lots of people, and you’ve got the ramp-up in the J.PODs as well. So should we expect a short-term margin hit but with a sort of more of a hockey stick in the back end for the 2025 target? And secondly, you mentioned the momentum coming into this year and the revenue guidance was particularly strong. So can you give us an overview of the order book, the new partnership activities that you had since the start of the year? Any sort of commentary on how that’s improved with reopening from COVID as well? That would be great. Thank you.

Thank you so much. First of all, when it comes to margins on the overall EBITDA, you should always see that this is strongly milestone-driven. And milestones will be volatile from quarter-to-quarter. So therefore, please look at this in the long run. And in the long run, with a larger portfolio of milestones coming in, margins also go up. Nevertheless, you see in short-term, margins being strong and going forward, becoming even stronger. So at this stage, we can see that, for example, price increases that we get on our supply chain can largely digest, not all of it but largely digest. And as the number of transactions that are milestone bearing have gone up in the last years, there is a larger portfolio potentially coming there. So that’s why overall margins will be stable or positive in the short run and even stronger positive in the long run. And on the second question, I think one of the most beautiful aspects of ‘21 and beginning of ‘22 is that our expansion and our strong order book especially comes from a network of partners who are going deeper with us along the value chain. So it’s less, but of course, also driven by new partners coming to our platform. But most importantly, we see partners, once they have started to work with us, to really continue to stay on the platform. What do I mean with this? Many of our early discovery partners now continue to use us also as development parts. Of course, this cross-selling effect is, going forward, you’d see less cost that we have for business development, less cost that we have to invest in generating new partners because we are going with them along the value chain, which, of course, is very good for us in also generating better margins. So that’s one aspect of the stronger of the very strong order book that we see. Coming to COVID, COVID has for us, two aspects. One, of course, is an internal negative effect because our sales – our own workforce of 4,400 people has been also hit by COVID. Therefore, we see significant costs occurred through that. But of course, it’s largely compensated by the fact that many people are working since COVID, even more intensity with Evotec because our platforms have never closed and have always delivered. And I think that will be a key transformational step for the whole industry. But now once the industry is asking themselves how should we build our network in the future. Places like Evotec are strategic outside innovation places with even more central and we are becoming already for many of our pharma partners, our virtual biotech partners and our mission-driven foundations. I hope that answers your questions. And with this, we go to the next question.

The next question is from Joseph Hedden, Rx Securities. Your line is now open.

Good afternoon. Thanks for taking my questions. I’ve got two. Firstly, could you please tell us how much was invested in EVOequity in 2021 and whether we could expect a similar level in ‘22? And second question, for the Just-Evotec Biologics growth, I appreciate that the J.POD in Washington has only been online since November, but how much of that 35% growth could we attribute to the J.POD activities? Thank you.

Great. First question goes to Enno; second question goes to Craig.

Yes. And the first question is relatively easy. We were close to €22 million that we invested into equity.

In ‘21.

In ‘21.

And we don’t give ourselves a guidance for ‘22 because we look on equity opportunities on a case-by-case basis, but we see a strong pipeline of potential engagements for this year. And also, don’t forget, one of the reasons for NASDAQ listing and one of the use of proceeds in our NASDAQ listing was also to where the case is right, to also continue these operational synergistic investments. Second question goes to Craig.

Yes. Thanks. Yes. So the J.POD coming online, you’re absolutely right. The – in November, that did indeed attract some revenue, which we’re very pleased to recognize in November and December. But actually, in terms of the quarter four performance, the main contribution to the increase in quarter four performance and particularly the uptick overall was particularly due to milestones and other elements of the base business growth in quarter four. We had a strong quarter four in other aspects of the base business, and there were tremendous milestone contributions in that quarter.

Okay. I think just – sorry, just to follow on from that, I was wondering if you could give any kind of guidance to your expectations for the contribution for Just in ‘22.

Craig?

Yes. So, we don’t usually break out Just-Evotec Biologics in terms of revenue and contribution. But nevertheless, the two trains are well occupied. The two first trains are well occupied during the course of this year and will contribute a substantial increase in the Just revenues over 2021, because of additional capacity as well as process development expansion, which of course, feeds later manufacturing runs for the yields down the track. So, we are looking forward to Just-Evotec Biologics growing again in percentage terms well into double digit from 2021 into 2022.

And double digit here on Just-Evotec Biologics growth doesn’t mean 10%, doesn’t mean 20%, means significantly more than 30% growth that we are expecting here, just to give you here a bit of color.

Okay. That’s very helpful. Thanks very much.

The next question is from Falko Friedrichs, Deutsche Bank. Your line is now open.

Thank you very much. Good afternoon everyone. I have three questions, please. The first one is on the funding environment for biotech. There is obviously a lot of discussion out there. People are concerned about the potential slowdown in funding. So, I was wondering what you are seeing from your business perspective in that regard? Then my second question, there was plenty of news flow about your partnership with BMS over the last few months. Some of these news items came with pretty substantial payments to your company. So, I was just wondering if you can summarize for us where we stand now with that partnership and what kind of news flow we can expect during this year? And then my third question is on your pretty impressive cash balance. How do you plan to utilize that over the next 12 months to 24 months? And what is sort of the level that you would always like to keep on hand essentially? Thank you.

Yes. So, the second question on BMS will go to Cord in a second. The third question on cash, which we hopefully keep in the bank and not on our hand will go to Enno. And the first question, if you allow me, I will comment a bit. So, so far in 2022, we don’t see on our order books an impact of the slower funding environment that, of course, we also see, especially in the U.S. NASDAQ markets because in Europe, it’s compared to NASDAQ and to public markets in the U.S., not that relevant. Having said that, don’t forget that many of the companies are still very well-funded in the U.S. environment and also don’t forget that typically, the impact that we see of these companies cooperating with us is between 2 years to 3 years after their funding has happened that we really see substantial top line and bottom line impact of these companies on our situation. So, that’s why the slowdown of the funding environment, for example, within gene therapy companies in the U.S. at this stage is something which we, of course see, but doesn’t operationally affect us too much at this stage. And we also think that the second half of 2022 should be an uptick in the funding environment again. So, that’s I think, by – so far, that’s not any reason for us to be concerned. The second element you should see here is that the slowdown of private funding has been also partly compensated by significantly more public funding into the biotech industry and also by more public organizations cooperating with platforms like Evotec. So, just if you look at the whole pandemic preparedness business that we have gained, that’s a very nice compensation for us with some of the public – some of the private elements that have fallen away. And the third element, of course, is always here that we have a very well-balanced portfolio of partners, not only biotechs, but of course, also pharma partners and mission-driven foundations and academic institutions. And especially with mission-driven foundations, we don’t see any slowdown at this stage when it comes to the partnerships that we are having with them. So, a long answer for a short question. It is concerning in the mid-term if funding environment doesn’t increase in the short-term for us, it’s not concerning. With this, I hand over to Cord on the BMS overall picture.

Happy to give a little bit of an overview here. So, with BMS, we have multiple highly productive partnerships, in particular, of course, the – what we call the BMS neuro collaboration, but then also a second collaboration in the area of targeted protein degradation in particular. And beyond that, additional partnerships that are also in the field of target protein degradation, but still at an early stage essentially. You have seen last year that, in particular, the BMS neuro collaboration has delivered quite a number of very substantial milestones. Based on these milestones, we have added additional programs in the portfolio and we have – we do see quite a number of additional opportunities here for 2022 as well. And of course, these milestone-driven achievements are always based on data that has to be generated and achieved. We can’t make any hard predictions here. But overall, I would say the pipeline is well filled here for additional milestones in 2022 for the BMS neuro collaboration. The BMS target protein degradation collaboration that only started 3 years ago, we are very excited about. It’s been a highly productive partnership where first milestones were actually achieved last year and the year before that. But here, we do see an opportunity to even accelerate on the initiation of key projects in lead stages and lead optimization stages, filling in the pipeline even further. And so overall, we see probably as many, if not more opportunities here in the future in our targeted protein degradation collaboration as in the BMS neuro collaboration. And then the earlier stage collaborations, I don’t want to go into detail because they are still at quite early stage. But here, we also see opportunities to add to this mix essentially. And so essentially, the overall view is quite positive for 2022, but even beyond that.

Thank you so much. With this, we go to the cash question and back to Enno.

Yes. Pleasure having you on the call, Falko. So, to the cash position, in principle, I would like to make one reference first, and that is to our F1 prospectus from last year where we had a detailed breakdown of our investment activities in context of our use of proceeds. That is still valid in principle. So, if you want to look into the details. In general, it is about investing into acceleration of our business and investment of our facilities and sites, in particular, further ramping up and potentially expanding the capacity of our J.POD 1 in the U.S. as we spoke about additional trains in the past. The biggest ticket will definitely go into our second J.POD building starting to build in the second half of this year, but also scaling our existing R&D platforms that we are driving forward will take some of the investments, general capacity and facility expansions as we have to bring all the people to work and into the labs, lab equipment. That’s another big building block. And last but not least, what we were referring to before is our equity engagement in terms of our EVOequity activities where we will continue to invest. To the question, what is our lowest threshold, so to say. Technically, our threshold is very low. So, from a covenants perspective, it’s in the low to mid-double digit million euros. So, that is not a serious topic. And then internal calculation, we have whether we say it should be at least above €250 million as a reserve.

Don’t forget this is a positive operational cash flow driven company. That’s why this number is not that relevant for us. And maybe if I may add one comment here, I have worked for Evotec now for more than 12 years. There has never been a time where investing in our internal platforms out of our cash has been so rewarding into the future as it is right now. So, that’s also why you will not see major spend of our cash balance as you see it today into external acquisitions. Because we really see that there is a lot to be gained by investing on our own platform better than anywhere else. We never exclude also here, of course, external acquisitions and we will also look at many of these things, but the threshold is very high.

Okay. Thanks a lot.

Falko, that’s okay for you? We would go to the next question.

The next question is from Igor Kim, Berenberg. Your line is now open.

Yes. Hi, this is Igor from Berenberg. I have got a couple of questions from my side. I think you mentioned that energy pricing, energy cost is one of the factors that could impact your margin. But do you also see the cost inflation on other fronts or maybe I think wage inflation is more relevant for you? And if yes, is it possible to kind of quantify how does it look year-over-year so far in terms of wage inflation? And in general, how much of this, let’s say, cost inflation and energy prices impact is factored in your EBITDA guidance or margin guidance? Second question is CapEx, how much of that do you expect for the current year given that you plan to start in the second half of the year, second J.POD in Toulouse? That’s it so far. Thank you.

Yes. So, first question on energy cost and cost inflation goes to Enno, and on CapEx also, to Enno.

So, I have it all. Thank you very much. And I will start with the CapEx. Werner already mentioned that it could be in the range of up to €300 million for the year 2022 in total. That is probably the very upper end of our expectations. Things will depend on the progress of the construction in particular, as I said before, of our J.POD 2 in Europe. So, it could also be that it comes out at the end of €250 million, but that’s a realistic range that we are looking at from today’s perspective. On the energy costs, we have assumed currently roughly increase of 30% in our current budget cost increase for energy, gas, electricity and so on. And we will have to monitor whether this will be sufficient as things develop and continue. So, that’s something that we are clearly having on our radar, but that is the base from what we have expected. Of course, there are other parts that are also influencing the cost – influencing the cost development over time, and you were referencing to salaries and wages, which is clearly increasing on average. And also here, we are monitoring this. So far, our measures internally have been pretty much in line with what we have been doing in the past years, which was always 3% to 4% increase per year. But obviously, we have to make sure that we stand within the market competitive bandwidth, and therefore, this needs close monitoring as well. But that’s what we have in the budget currently for 2022.

Okay. Thank you.

Pleasure, Igor. With this, we hand back to next question.

The next question is from Michael Ryskin, Bank of America. Your line is now open.

Great. Thanks. I will try to be quick given the time. First, I want to follow-up on some of the questions you have already touched on regarding reinvestment back in the business. Could you give a little bit more detail on what particular technologies or platforms you are really prioritizing? I mean you have been focusing on partnered R&D for a number of years, but it’s still a pretty sizable step-up this year. So, if you could just provide more color on where are you are seeing the best opportunities for that incremental spend you are going to make in 2022? And then sort of following up on that, you are still targeting about €100 million in 2025. So, is this more of a one-time step-up? I guess I mean to say that the incremental growth in the next couple of years seems to be a little bit slower. So, just walk us through the timing for that and why this year is the right time to make that investment?

Yes. So, the first answer is, I think very clear that we are building platforms which are driving probabilities of success up. And this massive investment goes, for example, into omics-based technologies for drug discovery. And the future of drug discovery, which will be omics-based can only be handled if you have platforms that have the right omics-driven data collection, but also the right data analysis tools at hand. And that’s what Cord was referring to when he said PanHunter as, for example, an essential tool on our PanOmics platform. That’s clearly one priority that we want to fully invest in and be very quick in doing this. The second is everything which is probabilities of success when it comes to molecular patients derived data. And with this building out our molecular patient databases a starting point for drug discovery and drug development is a massive long-term effort, which will also gradually go up over time, but we are making really some step functions of investments this year. For example, after building up our kidney disease molecular patient database, we have been starting to build up massively our liver-driven molecular patient database, our neuromolecular patient database, our I&I and immunology database is, as we speak, fully up to speed that we want to gain here. So, these are investments that we are making in this area. And the third one to mention here is organic growth and driving this on induced pluripotent stem cells platforms and cell therapy platforms when it comes to drug discovery, but also to cell therapy, where we are really going a step change forward from what we are doing now. Why, because induced pluripotent stem cells is driving probabilities of success up and cell therapies as right modality for certain indications. Like we do this in oncology, for example, but also with our CureBeta project in beta cells is absolutely key and on strategy for us, and that’s why we continue to invest into these platforms and technologies. And that just gives you a selection of the mix while organic investment is absolutely right here at this stage. And if you translate this to your question on the €100 million in ‘25, that’s really something where I would say we have modeled this out, but we will monitor this on a year-by-year basis and say what is the right return on investment number that we want to put forward here. So, I think the slow growth of that number compared to the other numbers should just show you probably that it is hard in drug discovery and drug development simply because most of the investments go here into top qualified people to build more than the number of people that are behind that number on the speed where we would like to build that. If there are opportunities, for example, to accelerate R&D investments with automatization or other tools, that number could be higher. When it comes to the growth of people behind the number, it’s probably not easy to exceed that number.

Okay. Thanks. If I could squeeze in a quick follow-up, on the €105 million to €120 million adjusted EBITDA guidance here, I want to make sure I heard you correctly. You mentioned in the prepared remarks sort of how some of the milestones and upfront payments obviously flow through at a really, really healthy margin that could play a big role. Did you indicate that, that €105 million to €120 million already assumes a healthy amount of that upfront payments and milestones, or is that upside from those levels? I want to make sure I got that comment correctly.

Just to bring you into the process here. At the beginning of every year, we look at the potential achievable pool of milestones, we then risk adjust this potential achievable pool of milestones. And for example, if there are any milestones like our P2X3 expected Phase 3 milestone drops out, it’s a digital drop out of the milestone. That’s then always corrected and updated to the later stage number. So, I think what you see here is a good year expected on milestones, but not an exceptional year expected on milestones from a risk-adjusted view of the potential achievable milestones that we see. So, yes, there is outperformance potential on that number. If it would be just, for example, a full portfolio of milestones that really hit and that come. But that’s then typically happening sometime in the middle of the year or in the second half of the year also to guide you on this one.

Great. Thank you.

Next question please.

The last question in line is from Zoe Karamanoli, RBC Capital Markets. Your line is now open.

Hi. Thank you for taking my question. One left for me. I think we understand investment in R&D in order to expand and improve further the top line growth. So, I am wondering if you can provide more color on how you assess progress over this longer term growth for the Innovate segment? And are there any near-term lead indicators that you track that gives you confidence that the action plan for 2025 will be achievable. For example, is there any particular number of partnerships that you want to form this year? Any KPI here would be very helpful. Thank you.

Yes. Great question. And of course, everything that we do is following controllable KPIs. And if you look at, for example, the KPIs on growth of Innovate over the last 8 years, you see every single KPI, not only achieved but even outperformed. And that makes us very confident that the long-term, so to say, first, investing and then harvesting back these investments on our Innovate portfolio is the right way to go, especially once these partnerships mature and come into higher milestone-bearing and royalty-bearing situations. That’s why you have to think it long and not short. Why, because if you look at the – for example, 200 milestones behind every individual projects in our, for example, BMS alliance or J&J alliance or in our Lilly alliance, then the milestones that we are generating are increasing in their size over time. And of course, royalties are typically attached to product sales that’s why they come later. So, that’s KPIs that we monitor, and that’s KPIs that make us very comfortable that this is on the right track, not only when it comes to Innovate investment. It also comes to the right KPIs when it comes to our base business investments. If you just, for example, follow here our investments into safety prediction. And if you look at the growth of that business and the margin expansion of this business, then you also see here the right trajectory or if you look at our development business, then you see that our co-owned pipeline is one part of feeding this development business. And with this cross-selling as a key KPI that we are following is driving our business and the flow of our business. So, we could expand this here for a long time, but I think the short answer is yes, many KPIs point in the right direction.

Thank you.

Pleasure. With this, thank you for staying a bit longer than the usual hour today, but it was our, I think update which is important for the start of the year. And if you have any further questions, don’t hesitate to reach out to our IR team, where Volker is happily answering your questions. And with this, let me thank our team. Let me also thank our team who puts together the full year-end results and put all the effort into making this a complete version of a fantastic report that we can give to you. You can imagine how much work this is in year number one after starting a NASDAQ listing. So, it was a great effort from the team. And with this, big thank you to the team and also to the whole company and to you as our external partners. Thank you so much. Have a great day.

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