Evotec SE (EVO) Q1 2022 Earnings Report, Transcript and Summary

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

Welcome. Welcome to our Q1 quarterly call to Evotec. It's great to welcome you on the R&D of Autobahn to Cures where we are landing and expanding and setting the pace for drug discovery and development. We have uploaded a presentation for this call. And you will always find this presentation on our website and now on the webpage to follow. If you go to page number two of this presentation, you can see that I'm here together with my team. And I'm especially happy that our new CBO, Matthias Evers has joined the team and let us warmly welcome him in this crowd as well. I'm here together the Enno, our CFO, our COO Craig and our CSO, Cord, who was in this call also bring a bit more color and deeper understanding to the yesterday announced extension and expansion of our landmark partnership in targeted protein degradation with BMS. With this short intro from appear, I think it's also appropriate for all of you. And with this I hand over to Matthias.

Thank you very much, Werner. I'm very happy to. You asked me the rationale for joining Evotec. And from my point of point of view, it's very simple. As a scientist by heart, and having now co-led R&D for pharma and biotech globally at McKinsey & Company over the last 20 years, I'm drawn to Evotec for multiple reasons. I see strong science capabilities, a very collaborative approach to build a shared R&D economy, and a very strong can do culture was focused on excellence. And also a bit more specifically, I've invested a lot of time and research to explore the convergence between science and technology. And with a new functional, bringing together business development, technology and strategy, I think it will take as a perfect place to deliver on this promise. It's really an honor to be here on the team with everyone. I believe Evotec is perfect to beginning. So I couldn't simply be more excited. So Werner, let me give it back to you.

Thank you so much. When it comes to the beginning, let's please go to page number five of this presentation. And you will see that we had a great start and a strong performance in all building blocks of the company in Q1 2022. Just a few highlights here you see strong momentum in business build up in all lines. We have announced a collaboration with Boehringer Ingelheim on our EVOpanOmics stem cell platform we have announced a new collaboration with Eli Lilly on our molecular patient databases in metabolic diseases. We have launched a broader initiative around molecular patient databases, which you will hear a lot from in the future. Our co-owned pipeline is progressing in multiple areas. We have received a grant from the German authorities to develop our clinical program in multiple viral diseases forward. You have seen strong progress in our ongoing neuroscience collaboration with BMS. And you have yesterday seen that we have landed a fantastic deal in targeting protein degradation with BMS. When it comes to our equity portfolio, we have made new investments into Centauri, IMIDomics, and Tubulis, which just shows you that co-ownership for us is a strategic endeavor that will never stop as long as not all diseases are cured. We also very happy to report back to you that our, Just - Evotec Biologics business line is performing very well. And we are very happy with the transition from a construction site last year to a site where we are already producing materials as we speak and Craig can tell you more about this later. When you go one page forward, and you're looking at our numbers. We are very happy that we can confirm our guidance in a very comfortable way. And our guidance shows you not only that group revenues in first quarter went up by 24%, but also that we will grow this year, up to €700 million to €720 million on the top-line. Our guidance also shows you that we are accelerating our R&D investments to €70 million to €80 million is here. And these are the investments that we first make to then bring back transactions, like for example, our targeted protein degradation deal with BMS. So watch out for more to come here because leveraging our R&D investment into long-term value is exactly our strategy. And when it comes to our EBITDA, we are very happy to report a profitable first quarter, which is totally in-line with our expectations. And we're expecting here €105 million to €120 million in EBITDA this year. So guidance is fully confirmed and very competently confirmed at this moment in time. When you go forward, Enno will now bring you into our Q1 numbers in more detail. And with this, I hand over, and say thank you from my side first.

Yeah, thank you, Werner. And a warm welcome also from my side to everyone. It's a great pleasure having you on part today for our Q1 update. Starting with a general overlook, three months 2022 numbers show an excellent 24% increase on our revenue line has Werner just indicated already. And this growth was observed in all business areas. The gross margin amounted to 19.6% below last year's 23%. I'll come back to that on the next page. Group R&D expenses remained constant with €18.1 million, thereof, unpartnered R&D expenses increased, whereas partnered R&D expenses decreased. The R&D spend in Q1 was focused on enhancing our multiple platforms and the continued acceleration of our co-owned pipeline. The increase of roughly €10 million or 49% in SG&A expenses versus last year was mainly attributable to the recruitment of personnel to support the overall business growth and buy costs for our secondary NASDAQ U.S. listing which we closed last year. Furthermore, the capacity expansion resulted in higher depreciation of facilities, in particular related to the already before mentioned J.POD and Redmond U.S. and rising energy prices also made an impact in Q1 2022. The other operating income and expenses increased by €2 million and continue to be driven by tax credits and ideally all related reimbursements from Sanofi. Main reason for the increase income were tax credits in Toulouse, France and reestablished tax credits in Italy, which could be claimed from June 2021 onwards again, and hence had no income or no comparison in Q1 2021. With the total of €18.9 million, our adjusted EBITDA lands within our expectations, but slightly below last year's €21 million. Also, when looking at the phasing over the last year in the past, this is in-line with our guidance. For Q1 2022 we also reported net loss of €73.2 million, which was influenced by the fair value adjustments and our equity investment in Exscientia due to their recent share price development. Slide 9 depicts our strong revenue growth of 24% of all which was spread across all business areas, as I mentioned before. Recognizing some FX tailwinds at constant FX rates, year-on-year revenues would have increased by 19%. Important to notice once again, the strong growth of our base business growing at a rate of 25. Gross margin and decrease versus last year resulted mainly from investing in our precision medicine platforms and the continuous ramp up of our J.POD facilities in the U.S. and in France, as well as significantly higher depreciations due to the continued capacity expansions. Total gross margin excluding Just - Biologics would have reached 27% versus 23% during the same period of the last year. Coming to Page 10, as indicated before, both the segments continue to grow and perform well, reflecting the broad basis of our gain. Year-to-date Execute revenues in including intersegment revenues through 27% to €175 million in Q1 2022. This is further driven by an increase in demand for integrated office and a strong demand for the base business. The adjusted EBITDA Evotec Execute improved by 14% to €32 million. On the other side, three months 2022 Innovate revenues amounted to €36 million, Excellent also 27% above last year, due to continuous high demand for precision medicine, reflected by extended existing as well as several new partnerships and despite lack of milestones in Q1 2022. Innovate’s total R&D amounted to €21.2 million which is 17% above last year, underlining our continued investment and commitment into innovation projects and long-term sustainability. The expected -- as expected, the adjusted EBITDA of Evotec Innovate remained negative with €13.4 million. Slide 11 summarizes Evotec’s very solid and sustainable non-P&L related financial KPIs. And here the balance sheets contraction resided mainly from the revaluation of Exscientia in Q1. Trade accounts receivable decreased by €36 million due to €40 million of milestone and pre-payments cashed in during Q1, mainly related to our BMS surging collaborations. This improved our DSO or days sales outstanding figure for Q1, 2020 to 255 days, which then again is within the corridor that we aim for moving between 50 and 60 days. The equity ratio remained at a very solid 60%. And when we can -- and we can report a net cash position of €490 million. And these factors together indicate plenty of headroom and flexibility to further invest into organic as well as strategic growth if need be. Total liquidity -- total liquidity was nearly unchanged to year-end with €855 million. And this allows us to continue planned CapEx investment to support growth projects as well as general expansion of our capacities across all sites. Furthermore, we continue to plan to invest into our equity engagements, existing ones and new ones, as Werner mentioned also before. And with that, I'm completing the financial part of the overview for today. And hand back to Werner. Thank you very much.

Thank you, Enno. If you go to Page 13 of this presentation, let me introduce you to the section that Cord will then take over. Let me, at the same time, guide you to our Capital Markets Day presentation which you find online, where we typically lay out a scientific section that we then transform into a business segment, or into multiple business deals, where today we will introduce you to targeted protein degradation in a deeper guidance. And when you come to the underlying principle of our growth strategy, when it comes to transforming science into business, the principle is very simple. Do outstanding work and you will grow with your partner. That's what we're doing. And that's the principle that we're following. So it's not a coincidence, when we are landing and expanding with our partners. It is simply the function of outstanding work that is performed on our platform every day. This is a big thank you to the whole platform and all the teams that are collaborating to make this such a well performing platform. So it's not only a deal that we struck with Lilly, not only the deal with Boehringer also what we have just done with BMS that is testament for that. And with this, let me hand over to Cord to bring you deeper into targeted protein degradation.

Thank you, Werner. And good morning and good afternoon to everybody on the call. Today, we would like to give you a little more background to the field of targeted protein degradation, Evotec’s approach to it and why we feel fortunate to have BMS as our partner here. Let's move to Page 16, for this. The field of targeted protein degradation is one of the hottest fields in the pharmaceutical industry as it harbors enormous potential. Small molecule therapeutics are the mainstays of the industry because they have proven to be highly effective. Furthermore, due to their all availability, they are particularly compelling when it comes to the ease of use. However, there are limits to traditional small molecules, in particular, the fact that many high potential drug targets lack proper small molecule binding sites to inhibit their function means that many high potential drug targets are essentially undruggable by our traditional small molecule approaches. The discovery that small molecules can also be used to specifically trigger the degradation, disease causing proteins very significantly expands the universe of drug targets that can be treated by a small molecules. This is the main reason why this field is drawing so much attention by the pharmaceutical industry. During the last two years, many pharma companies partnered with biotech companies to access technology or capabilities or know how to support their small molecule efforts in targeted protein degradation. At Evotec, we have been collaborating with BMS in the field of targeted protein degradation since 2018. Yesterday, we announced the extension and expansion of this collaboration into a long-term strategic partnership. And the cornerstones of this deal are summarized on Page 17. The aim of this partnership is to build an industry leading pipeline based on molecular glue degraders, which is expected to deliver multiple novel drugs into the market. The partnership between BMS and Evotec is a formidable match that BMS being an established pioneer and leader in targeted protein degradation, whereas Evotec will contribute industry-leading platforms including but not limited to, EVOpanOmics, and EVOpanHunter, but also a suite of AI machine learning tools supporting the whole drug discovery value chain. Evotec the receive $200 million dollars as an upfront payment and potential milestones in total of over $5 billion. In addition, Evotec is eligible to receive significant tiered royalties on each and every product developed through this partnership. Page 18, is putting this collaboration in context of other deals signed in the industry. Many pharma companies are not only interested in the field, but also signed sizable partnerships with biotech companies. One of the largest transactions was the acquisition of [Indiscernible]. Most of the other deals focused around small number of projects, or even just one project. When it comes to our partnership with BMS, we are excited about the opportunity to continue and expand our partnership to the leading company in the field. We believe that the scope, the length, and depth of the collaboration is unique in the industry and set Evotec take apart from all the other players. But let's take a step back and briefly talk about how a targeted protein degradation works, which is shown on Page 19. Targeted protein degradation works very differently from traditional small molecules, which usually functionally inhibit target proteins by binding to one of the active sites. In contrast, small molecule degraders also bind to the target proteins, but here the binding triggers proteolysis of the target protein and thus complete abrogation of the target protein as well as all its function. Triggering the degradation of the target protein is a multistep process as shown here. It involves a specific binding of a small molecule to a target protein, that the concurrent recruitment of an E3 ligase. The E3 ligase is then able to ubiquitinates the target protein, which subsequently goes through the proteasome. And this is where it's then ultimately degraded. Once again, proteolysis of the target protein not only abrogated function on a particular active site, but completely removed the protein with all its functions. Through this very different mechanism of action, molecular glue degraders have enormous potential in the field of small molecule therapeutics, which we briefly want to discuss on Page 20. As I already mentioned, small molecule therapeutics are the main thing of the industry, taking a drug orally is clearly the preferred way of administering a drug. Unfortunately, many potentially high the effective drug targets lacks suitable small molecule binding sites to inhibit their function effectively by a tradition of small molecule inhibitors. Small molecule degraders have demonstrated the ability to target even these historically undruggable target proteins. This is particularly important considering that about 90% of the human proteome cannot be targeted via traditional small molecules. So small molecule degraders are expected to significantly expand the universe of small molecule drug targets and thereby open up opportunities to develop novel breakthrough drugs and that orally available therapeutics. Besides being able to target drug targets that are historically seen undruggable small molecule degraders have also a number of other advantages over traditional small molecule inhibitors. Small molecule degraders work catalytically that means that once they have triggered the degradation process of a target molecule, they can do this again and again, and therefore require usually smaller doses and traditional small molecules. Furthermore, as they degrade the target protein, they are less likely to lead to the development of resistance. These advantages, and the tremendous potential of targeted protein degradation has obviously been recognized by the industry. On page 21, you can see that as of today, more than 150 protein degradation based therapeutics have been reported to be in discovery and development in the industry. Currently, the vast majority of these are being explored in the context of oncological indications but others are assured follow. What is interesting to note though, is that the focus is currently still on protect molecules rather than molecular glues. PROTAC which stands for proteolysis targeting chimeric molecules are fairly complex molecules, and are not very drugged like. They usually have two functional lens connected by a linker, which makes them bulky and unattractive from a number of factors. On the other hand, we have the molecular glues, which are much more elegant and drug-like molecules, and they have a number of advantages over PROTAC, which are summarized on the next page. In contrast to PROTAC’s molecular glues are more drug-like and also have better pharmacological properties. In addition, they're usually more synthetic -- synthetically tractable, and for this reason, are also more attractive from a cost of goods perspective. However, historically, PROTAC can be -- or more easily pursued via a rational drug design approach against almost any particular target. For molecular glues, rational drug design against a particular target has been more challenging because the structure activity relationships were less obvious for these kinds of molecules. However, combining BMS extensive experience and unique and extensive molecular glue library with Evotec’s high performance omics platforms, is the first unbiased and highly systematic approach to identify and develop a pipeline of medical glues, and as a great opportunity to develop a joint pipeline of molecular glue-based therapies. BMS is clearly the key pioneer and leader in the field of targeted protein degradation and in particular molecular glues as you can see on Page 23. They were the first to elucidate the mechanism of action of molecular glues. BMS has successfully built an exciting pipeline based on molecular glues. And of course, BMS generated over $15 billion dollars in sales based on drugs, which act is molecular glues already. Furthermore, over the last three years, they have assembled a unique industry leading library of molecular glues, which is genuinely refer to CELMODs, CELMOD stands for cerebellum E3 ligase modeling drugs. This is just another way of describing a molecular glue. Together with BMS, we created partnerships to explore if it was possible to systematically identify molecular glues using an omics-based approach and this is shown on Page 24. This collaboration, which initially was exploratory in nature, proved to be highly productive in identifying high potential molecular glues. This is the reason why we decided to extend and expand this collaboration into a long-term strategic partnership. As I already mentioned, Evotec will contribute a number of platforms but most importantly our panOmics and panHunter platforms which are uniquely suited for this purpose. On Page 25, we just want to give you a little bit of flavor on what sets EVOpanOmics phenomics platform apart from other maybe similar platforms in the industry. At Evotec we have built a unique proprietary omics generation platforms specifically for transcriptome and proteome data generation. These platforms, which are called screen, so I can screens PEP, are not only highly versatile when it comes to what cell and tissue types can be analyzed. But it even more importantly, these platforms operate at unprecedented scale and deliver unprecedented quality of data. I just want to mention a couple of metrics. Our transcriptomics platform operates at high throughput in 384 well format and still qualifies up to 15,000 genes per sample. This is a resolution that is usually only achieved via deep sequencing. Similarly, our proteomics platform is able to process tens of thousands of samples annually, quantifying up to 10,000 proteins based on single shot proteomics. So what makes Evotec’s platforms unique is really the overall performance. They are unique, highly industrialized platforms which operate at unprecedented scale, and deliver highest quality data in the most cost-efficient manner. As our platforms are delivering absolutely huge amounts of omics data, these data require a unique infrastructure for analysis, which is shown on Page 26. Exactly for this purpose, we have developed a platform that we call panHunter. PanHunter can manage and integrate huge amounts of omics data coming from patient samples, as well as a pharmacological data. The user-friendly integration of these datasets together with embedded AI machine learning data analysis tools allows data scientists to focus on answering key questions to drive their project forward rather than struggling to apply an AI machine learning algorithm to a particular set of data. This enables us to better select the most promising molecular glues, even very early in the process, we can better predict the efficacy and safety profiles of these compounds, and accelerate the transition from leads to candidates to INDs, as well as ultimately select the most appropriate patient populations for clinical development. We hope that this presentation has given you a little more insight into our strategic partnership with BMS in the field of targeted protein degradation. And in many ways the field of target protein degradation is still at its very beginning, there are clearly further opportunities in the space that go far beyond PROTACs and molecular glues, and even the proteasome driven targeted protein degradation. At Evotec, we continue to invest into these areas to create further partnership opportunities in the future. And with this, I'd like to thank you for your attention and hand you back to Werner.

Cord, thank you so much for this crash course in targeted protein degradation. This was 15 minutes. Science as beautiful as it gets and how we transform science into high value partnerships. And you will also see this is not only transforming science into partnerships, this will be times transformed into co-owned products, which is our strategy. When you go to page number 9 of this presentation that we step back, because it's not only a company that's developing science, and co-owned products, it's also a company that is delivering our contribution to the planet and to make the world a better place. With this, we will continue to report on our ESG and sustainability measures as we have taken them also in Q1, for example by really starting to follow our scientific based initiatives in many areas. We also on a governance level, are making a lot of progress, and want to intensify our stakeholder dialogue on multi-dimensions here. Page 30 goes back into our business. And you will see that we are significantly growing this company, the 10th year in a row now by more than 15% which is illustrated on our guidance here. You will see that our unpartnered R&D will lead to significant partnerships also still this here. And as already mentioned, the EBITDA is a function of how much money we spent into EBITDA -- into R&D and also how much money we spend into growth into the future but there will be clearly at least a stable EBITDA this year if not more. When you go one page forward, let me also come to confirm our midterm aspirations where we often say that we're just at the beginning. But it is just beautiful to see that there is no slowdown on the R&D Autobahn to Cures into the year ’25 and beyond that. It's actually fair to say that on some of the aspirations, we feel that we are even ahead of the curve than we have planned initially, but too early to tell in all details. When you go forward to the last page, you will see that we are setting the pace, also for this year in many dimensions. So you will see strong news flow coming from our R&D efficiency platforms with multiple integrated R&D collaborations to come, you will see that -- we in our Precision Medicine platform, we do everything with our partners to bring probabilities of success up and with this has a better chance to bring our co-owned patent the market. And last but not least, we are very happy about the progress of our Just - Evotec Biologics, where we have started not only to complete our checkpoint one, but we are -- where we are also making great progress in building J.POD number two in Toulouse, and you will soon hear about multiple partnerships that we are making in our Just - Evotec Biologics platform. With this, thank you for your attention. Thank you for all your questions to come now. We are more than happy to answer them.

Thank you. We will now begin our question-and-answer session. [Operator Instructions] The first question is coming from James Quigley at Morgan Stanley. Your line is now open.

Thanks for taking my question. So on the BMS contract, can you give us an idea of how you expect to recognize the $20 million upfront with a straight line or more of a proportion of completion, please? And this deal is somewhat different some of the others signed this year given it was a big upfront. So can you confirm that the royalty on the back-end is similar to the Lilly. For example, and within your sort of 8% to 10% range that you have had traditionally. And finally on the BMS, if you can give us an idea of how the milestones are split. One more question on Bristol as well. So you mentioned there's about five settlements in development in their pipeline. So what are they trying to achieve? Or what was the question is trying to answer by using your platform by using the molecular glues -- degraders through your Discovery partnership, as opposed to what they're seeing already with a [Indiscernible] particularly in myeloma where that shown some good data. And then finally, picking up on Just.Bio. So there's been some questions this morning, around the year-on-year growth rates, but then also on the sequential growth for Just.Bio. There is quite a bit of a step down from Q4, where things aren't around $18 million $19 million in revenues for Just.Bio $12.5 million or so in the first quarter. So if you could just give us an idea of the dynamics there. Was there sort of a flurry of demand back in the last year as companies spend their R&D budgets? Are there any other impacts in terms of batch-to-batch variability or anything like that that may have impacted the sequential is one of the year-on-year comparison for Just.Bio? Thank you.

Thank you, James. We do the following, we'll answer the Just question first, we then go to the cell of rational question on the platform. And then we'll go back to the commercials on the BMS deal. Let me start by Just and then hand over to Craig. We are very happy with the progress of Just - Evotec Biologics including our J.POD, a view from month-to-month basis on a business that we are building their trust with, I think really confused on a too high level on something where we see significant demand that is building up there. And that's why I wouldn't worry at all there. But maybe Craig you can illustrate this a bit better.

Yeah, I'll certainly try. Thanks for the question, James. As Werner said, we're really we're really happy with what's going on. I mean, to your specific question about, for example like Q4 to Q1. Of course, inevitably, there are some revenue recognition, elements of completion of batches and so on. But actually the main -- the main driver for shift between Q4 2021 and Q1 2022, is that during the course of 2021, there were revenues that were being brought in a recognized as we progressed through the completion of construction and indeed, technical and operational readiness, which came to an end when the facility opened in Q4. And so what you see in Q1 is all customer driven, partner driven demand and revenue recognition. But based on our warrants, and as I'm sure you're familiar with, there will be a certain amount of up and down as batches get completed in GMP facilities. Hope that answers the question, but very happy with the long view and the immediate future view for Just. And hopefully you can bear with us and watch out for the news for that we look forward to sharing with you during the course of the year.

Thank you so much. With this may be Cord, I hand back to you on the synergistic platform from Evotec to the BMS pipeline building activity.

Yeah gladly. So unfortunately, I cannot comment on any detail here on what indications we are in particular targeting other than that oncology is clearly a key area of interest. I think -- but what I can say is so that we are clearly shooting or selecting for high value drug targets, which are either traditionally undruggable target targets, they're all basically, so far they actually have thrown the interest of the industry, but people have just not been able to develop classical or conventional, small molecule against these targets, or for targets where a targeted protein degradation approach is simply superior, even against traditional small molecule approaches. And they are -- there are a large number of these potential drug targets out there already. And -- but through this approach, and in particular through our omics-driven approach, that it allows us to get to these faster and quicker and to select them more precisely than earlier.

Thank you so much court. With regards to your more commercial question on the transaction, I think it's fair to say on the milestone split that we're not talking about here in end stage milestones only. We're talking about very near term, achievable milestones in the preclinic, actually already in the discovery phase. With this, there is a significant milestone potential really near term in this type thing, which you will see once the achieved certain elements here. When we talk about royalties, it's tiered royalties, which can go beyond 10%, which is also fascinating from a recognition of the power of our technologies in this transaction. But overall, 8% to 10% average royalty rate on our co-owned pipeline that not only applies to this transaction is, I think, a very good estimate to apply. When it comes to revenue recognition, we have not shared the final agreement with our auditors at this stage. That's why we cannot fully comment because we have just signed through the agreement yesterday afternoon. But there will be two elements. One is of course, a prime element of the $200 million depending on how we feed the work here. And the second element is elements of completion, which are basically to be finalized with our auditors first and then we can get more color here, but you will see both elements that will lead to revenue recognition here. And this may be also last sentence here. We have a part of this transaction, of course, always assumed to be part of our top-line is here, how much of this falls into our bottom line? We'll definitely see -- constantly have done the full analysis. And we are working on this analysis.

Great. Thank you.

James. I hope that answers your questions. And with this, we go back to the next question.

The next question is coming from Zoe Karamanoli at RBC. Your line is now open.

Hi, thanks for taking my questions. Two questions for me, please. First on guidance. You're growing faster than your guidance implied. And yesterday, you announced the extension deal with BMS with the significant upfront for this year. However, you have redirected your guidance for this year. So could you help us understand what's holding you from raising guidance? And what are the things that we should be aware of? That’s the first question?

Yeah. Second question?

The second question is on the investment in Evotec equity, if you could elaborate where those investment opportunities derive from -- is it from the being a portfolio of Evotec Innovate? Or is it outside this?

So on guidance. Zoe, thank you so much for your questions. First, it's early in the year. Second, we see a very strong order book, actually the strongest order book in the company ever. Thirdly, at this stage, we see and that's not only true for Evotec, it's true for many other companies as well. We see many more insecurities when it comes, for example, cost increases, supply chain increases than before. We are constantly double checking all these processes. We have just started to review this process again. And I think with this, it's very fair to say that we can constantly confirm our guidance on the basis of a strong order book, a strong outlook, and a strong deal pipeline. But it would be too early in the year to change the guidance that we have very diligently prepared for the first quarter and also for now. But again, it's something that we constantly monitor. When it comes to Evotec equity, we have multiple sources of where we find our sweet spots to invest. But there is one element which has to be always in place, that there is an operational synergy of the companies where we invest to Evotec platforms, because this principle of the sharing economy where we want to learn together and make things better together, that's really across the board of all our co-owned companies the case, when it comes to where to better deal so come from -- deal flow comes from our network comes from outside of Evotec comes from invitations of our partners in the venture world, comes from invitations from other companies who want to create companies together with like, with us, like for example Latoya [ph]. So there's a multiple source deal flow, which then very diligently is explored on our platform. And then we are invested in these companies. We have, of course also the opportunity to spin out companies that we are generating on our R&D platforms within Evotec Innovate. And here we are, as we speak, working on certain opportunities as well.

Great. Thank you.

With this, I hope this answers your question.

Yes.

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

Good afternoon. Thanks for taking my question. I've got two, firstly, on the gross margin. You've highlighted some reasoning behind why that's a little lower this quarter. I'm just wondering what your expectations are for the rest of the year? Are these pressures set to continue? Or do you expect to rebound? And then secondly, on the BMS deal, congratulations, by the way. Slide 23, Just looking at the oncology pipeline here of the projects that Celgene and these other companies have been ordering oncology space. Now it is purely because these are -- these companies have big research interests in oncology or there's some kind of reason that the molecular glue approach is more suited to oncology than other disease areas.

Yeah.

Thanks.

So the gross margin question goes to Enno. And other areas for protein degradation to Cord would be great if you then comment as well.

Okay. And Joe, pleasure having you on the call here today. So, on the gross margin, there are a few things that will stay like for instance, I was referring to the increased level of depreciation. Thanks to building and going online with site in Redmond, for instance. Ramp up cost of Just is also there for this year to continue. On the other side, if you look at Q1 in particular, you will recognize that similar to last year, we did not have significant milestone income. If you compare that for instance, against the quarter Q4 of last year. And also here, I mean, clearly, we want to achieve further milestones this year, and depending on those, you could expect on average that the gross margin should increase compared to where we have been in the first quarter.

Which is, by the way, a pattern throughout every year to follow us in the last 12 years. And maybe, Cord, on BMS and other areas?

Sure. So, in the targeted protein degradation field, each and every company, of course sets preferences according to disease area indication that they are interested according to their own strategic goals. And that is not necessarily always adequately reflected in these still early stage pipelines. However, the oncology field of course, always draws particular attention, mainly because over the years, it has assembled quite a large number of potentially very high value drug targets, where the pharmaceutical industry has simply been -- not been able to find adequate molecules to target them. And in that regard, so there is a little bit of a backlog, I would say, of potential drug targets to go after using a new modalities such as targeted protein degradation, and here in particular, using PROTACs because here, the rational design approach is simply a bit more straightforward. Even though the molecules themselves are clearly less attractive than molecular glues. And we feel that molecular glues over the long-term, clearly dominate the field because they are simply much more attractive, small molecules from a chemical and oncological perspective. And it's just been, like I said, it's been more difficult to use a rational design approach here. But this is -- with the approach, we are taking the BMS here, which is once again, highly unbiased, very systematic. It’s something that is becoming much less of a bottleneck. And once again, I feel that over the longer term, molecular glues will simply take over.

And I think it's fair to say that areas where molecular glues in [indiscernible] will be found is in CNF, is also in infectious diseases, just to name two areas where you will see this field also evolving. Maybe we go to the next question.

Okay. The next question is coming from Christian Ehmann at Warburg Research. Your line is now open.

Hello, everyone. Thanks for taking my question. I have well, two. And I know I work with the question about gross margin company-wide was asked already, but I hope that you would give us more -- a little bit more guidance and ideas how the J.POD revenue contribution and gross margin you expect to develop over the years. It has a considerable impact on the gross margin overall, or at least for the Evotec Execute segment. And the second question is more or less in-line with scientific ones. What exactly is the difficulty in developing or identifying certain molecular glues? I would imagine something like steric hindrance or something which makes it much more complex to predict those molecules. But maybe you can give us a few insights, how this differentiates you from other parties? Thank you.

Thank you so much, Christian. I would say the broader outlook and also the cross margin implications and capacity build up. Craig, it would be great if you give us a bit more color again. And then I hand then to Cord again on the third question.

Sure. Thanks, Werner. Christian, thanks for the question. You're right, of course that the costs in the J.POD -- the fixed costs in the J.POD are substantial spec facility and the full impact of that are pretty much -- the full impact of that is carried in the Execute segment. But that's actually why we're actually quite satisfied and pleased that the trajectory in Q1 indicates our baseline for this year. And that we're looking forward very much to a revenue build up as the year goes on, which will then progressively, if you like, dilute the fixed cost. And this is really a phenomenon of starting a large facility, which was really came online in q4 of last year. And of course, we're really in the transition, as we look over the next 12 months to fully build up fully utilize, and fully have the pipeline flow of deals and businesses that will take us into 2023 and beyond.

Great, I hope that answers your question. And with this, again to the formal part in the scientific element here to Cord.

So I think the question about sort of what are the key hindrances that are in the field of developing targeted protein degradation approaches in particular, molecular glues. So simply said the field, in many ways is still in the very beginning. So as I alluded in the presentation, targeted protein degradation currently is mainly focused on using the proteasome of the cell to essentially shuttle proteins that we usually do their function to the proteasome for degradation. And this involves in particular, E3 ligase that basically trigger ubiquitination event of the target protein and then ultimately leading to degradation event. The key problem here is that with molecular glues, in particular, the structure activity relationships are not as well understood as in many other areas. But in my view, this is just a matter of time and numbers of molecules to be made in the future to better understand exactly how the structure activity relationship groups, and how exactly a molecule needs to look like in order to present it in the right conformational way for a ubiquitination event and ultimately a degradation event. So I think this will definitely move forward. The other hindrances, that currently the field is very much focused on one where very few E3 ligase says that are currently explored in the context of targeted protein degradation. However, in the genome there, we know that there are on the order of 600 to 700, or more E3 ligase in the system, and many more E3 ligases are probably suitable for similar target protein degradation approaches. And so once again, the field is still in its very beginning. And I think that, once again, in particular BMS through their extensive experience with molecular glues already. And also in particular, they're -- some of library which is essentially by far the largest collection of molecular glues in the industry, plus, deep understanding of the mechanism of target protein degradation via the proteasome in particular, is absolutely industry leading. And as I also mentioned already that, we bring a key component here with the omics-driven approach to this particular program, which is really fits a key extremely well, as well as another areas though. And I think together we extremely well positioned to really bring molecular glues all the way to the forefront industry going forward.

Okay. Thanks, everyone.

Thank you so much. I have the next question here from Peter [Indiscernible]. I don't know if your line can connect but it would be great to have you on the call here.

Yes. Next question is coming from Peter [indiscernible]. I'm opening his line right now.

Hi, hope you can hear me.

Perfect.

Great. Sorry for the technical issue. And thank you for that. So I've got a few questions. Firstly, if I can just add on the Just - Biologics, I wonder if you could talk a little bit about the type of customer you're engaging with and seeing demand from here. I guess curious if you can possibly give us a split based on internal versus pharma versus biotech. The reason for the question, partly is, I think, particularly, it'd be good to know how much in your exposure is there to the biotech customers? Because I know there are some who are obviously concerned, given the funding environment well, that could be. If you could talk a little bit about the demand you're seeing there, that will be helpful. Secondly, then just on CapEx. I wonder if you could just talk a little bit about the phasing of the capex, which we'll be considering for this year. Obviously, relatively big year for CapEx, we've seen some already in the first quarter. How should we think about the phasing of the coming quarters? And also, if I could push you on 2023, how much less CapEx to get do you think potentially at this stage, versus into stage for ‘23? And then if I could just go from the Bristol deal, curious here in terms of is the deal exclusive in terms of particular targets of interest that BMS elects to opt in on and then locks up those targets? Or equally, and you mentioned this in terms of the E3 ligases. Can they lock up certainly E3 ligases within this collaboration that others then can't work on? And equally, is it possible for them to lock up certain, I guess, hooks or linkers within the molecular glues that you're using? I guess, just curious in terms of what sort of exclusivity they have, or really is this just vary -- if you'd like just that candidate specific? That'd be great. Thank you.

Thank you, Peter. I will hand over on the exclusivity to Cord at the end, to Enno in the middle. And let me give you a color on Just - Biologics directly. We are as disclosed, working a lot, and hopefully even more with the Department of Defense, which is not exposed to any biotech slowdown in funding. We are working a lot and hopefully in the future more with Merck, as our first pharma partner that we have already signed up for a pilot in Just. And we are discussing at this stage, and also have signed up with multiple pharma partners, multiple biotech partners. And we don't see a slowdown or a danger of biotech funding within these customers at all. Of course, we are fully aware of the market situation. But it's not the partners that we are at this stage seeing who would have not funding available. It's really, that our technology fits to their situation in their value chain. What is more driving this question? The second customer segment that we want to highlight is that we're working a lot as you know, with for example, foundations like the Bill & Melinda Gates Foundation, who is a very fond customer of our technology there. Because we can address disease areas with our biologics that otherwise cannot be addressed with other technologies like for example, infectious diseases. And thirdly, we are also working on projects that are coming from our internal pipeline and our co-owned pipeline in the future within Just - Biologics. So to address the question, do we see as an impact of the slowdown of the funding environment, on any of our business lines at this stage? I have to say no, because that has not arrived that Evotec, thanks god at this stage. And it also looks at the type of partners who we are working with very well-funded at this stage. And we’ll continue to build on to be well funded. And with this, I hand back -- and I can underline this, again, with what I have already pointed out the strongest order book that we have seen in the history for 2022. And a lot of that is also already order book which is building up into ‘23, especially in biologics because as you know, these are very long-term phased projects. And the same is also true for our development business, whether it's very long-term phased business that is already part of our order books. And I go back to the exclusivity question, Cord and maybe you can comment on that.

Yeah, I have to do so. So yes, so in regard to exclusivity, yes, there are exclusivity provisions in the contract. Of course, generally, Evotec’s structure’s exclusivity around individual targets, where we have co-ownership in terms of milestones and royalties. And in this particular content, because of this long-term and their strategic, there are some additional exclusivity provisions that I don't want to comment on here. But I would say, looking at the whole field of targeted protein degradation, and it's sort of been alluded to that in Slide 27. The whole field is much bigger than what we currently work on together with BMS. And there are many more opportunities where Evotec is actively investing into alternative strategies. I already mentioned there are very interesting other ways than going via proteasome when it comes to targeted protein degradation, there are ways to particular target cell surface ligands, there are ways how to go by on non-E3 ligase. And then there are a whole universe of additional ligase that are currently not pursued by the industry.

Thank you so much. And on the CapEx question, back to Enno.

Yes. Peter, happy to take the CapEx question where we have seen roughly close to $45 million in Q1 of CapEx. And we will continue to significantly invest so that we would expect some final amount for the full year in the range of probably 250 million to 300 million more than 250. And currently, outstanding here is really the second J.POD which we are now starting to build, having the kickoff for the building construction side in hopefully the summer. That said, we have already quite a bit of CapEx, so that will be a very significant amount of the total expenditure. The other part is really about expansion growth. As I said before in the call, basically currently investing at every single facility, aside obviously from scaling the technology platforms, and our capabilities also in that regard. So you should expect to be in the range. And also for 2023, going forward, obviously, this construction side will still be there. We obviously want to go online here in 2024. So it will remain on a high level, a little bit challenging to say whether it will come down significantly compared to what we have this year as other things like finalizing the J.POD 1 in the U.S. will come to an end when we have -- once we have ramped up.

And maybe an additional comment here. If you go back to our perspectives when they went public in the November-October of last year. This was very clear our intent and our use of proceeds to also invest into CapEx. So that's why I think it is important also to say that we are doing what we promised our investors to do with this money. Thank you for your questions, Peter?

Pleasure.

Is there any question in the line?

Yes, there's one more question coming from Victoria English at MET Miles. Your line is now open.

Yes. Werner. You mentioned CNS briefly, in the course of the Question and Answers about target areas for molecular glues. Without commenting on your BMS deal. I'm just wondering whether in general, you see neurological diseases as a potential area for this technology, I'm thinking in particular, in getting hold of amyloid beta.

Hi, Vicky, great to hear you. Nevertheless, the competent or more competent person on the call to answer this question is Cord.

Hello, thank you for your question. And so in principle, targeted protein degradation approaches, as I said are, of course, broadly applicable to essentially almost any indication. And we currently have -- in our collaboration with BMS, we currently have a focus on oncological indications. But I think it's fair to say that we have not excluded any potential indications at this point in time. And we do have, of course, a vested interest in the neuro space through our other BMS collaboration. And I think it's fair to say that, particularly here we are, of course open to create synergies between these. But it's something, once again, where we feel we really want to go for the sweet spot of the targets, essentially target space. And that's really the key driver of that.

Thank you.

Thank you so much. I don't see any further question in the row here. With this, let me thank you so much. Let me also highlight that we will of course, put all the slides on our website and if there are any further questions that come up by studying the materials, please reach out to Alka directly or to any one of the management team. We are more than happy to answer your questions. With this. Have a great day and thank you for following Evotec.

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