Evotec SE (EVO) Q4 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the Evotec SE Preliminary Figures Full-Year 2022 Call. Throughout today's recorded presentation, all participants will be in a listen only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Dr. Werner Lanthaler, CEO. Please go ahead.

Thank you very much. A warm welcome from sunny Hamburg to all listeners. And let me first remind you that we have uploaded a presentation for this call, which you can find on the Internet and we have called it ahead of the curve leadership in our focus areas for medicines that matter. This brings me directly into how we wanted to start this discussion with you today because it is amazing to see what we have achieved in 2022. And let me start by thanking the whole company who is working every day to find new medicines that matter. Let me also thank you, my closest team, it's a big pleasure and a great satisfaction to go forward with you also in a year like 2022, which overall was quite challenging, but nevertheless we have achieved a lot. And as you have seen, in an environment where many things came unexpected, we have done the right thing and have kept our traction in being ahead of the curve. Looking at my team, I want to wholeheartedly say thank you to Enno. It has been a great pleasure to work with you for such a long time and I'm very, very certain that our paths will cross again in the near future. Let me at the same time and with this guide you to Page 4, introduce Laetitia to you. Laetitia will join us as of April and has started her onboarding process, but will grow fully into Evotec as of April. And then you will for the first time see and hear Laetitia at our Q1 presentation. When we come to a reflection of 2022, let me guide you to Page number 6. It is important to see what we are doing in the context of the convergence of technologies that ease going faster than ever before. And when we say convergence of technologies, this has only one goal for us. To understand diseases better than ever before and with this generate better starting point. We have pointed out here a few selected industry megatrends and you have heard about all of them. But what we want to point out is that in many of these megatrends Evotec is truly ahead of the curve by for example applying AI and ML based discovery methods, or by using Omics as a key tool for precision medicine of the future. And of course, when you think back only one decade, where Evotec started with an iPSC platform and you have seen how often we have seen megatrends coming and where we have put the company ahead of the curve to achieve significant results, which will result for medicines that matter very soon. On that note, let me guide you a bit into the highlights of 2022, but also not neglect that it was a challenging year where we also saw some lowlights. On the highlights, it is significant progress that we can show in our partnerships throughout the industry network, especially also with BMS. We have made the largest targeted product degradation alliance in the industry, and importantly, here you should see this is an 8-year alliance. On our iPSC, beta cell replacement therapy alliance, we are also making great progress towards the functional cure for diabetics. When you look at our multiple partnerships in many disease areas, progress is made on many fronts. On Just – Evotec Biologics, we are laying the foundation for strong growth in 2023 and by building J.POD number 2 in Toulouse, we also are fully according to our plans on our way. We have made some smaller, but very important acquisitions in 2022, and I want to highlight here how important our Evotec Modena clinical and commercial manufacturing platform for small molecules, for cell therapies, and our small molecule acquisition in Halle Evotec DS is. Progress on our data driven precision medicine platform is huge and launching PanHunter is just one act that shows you how far we are ahead of the curve here because generating the key data analytics tool in the industry, which was one of the triggers for many of our transactions that you have seen in the past and many more to come, is just a highlight here. Many of the diseases in the future will only be treated if we understand their molecular core. So, creating molecular databases, what we call E.MPD, is a key highlight that we have started in 2022 on a quite aggressive path and we will continue this into 2023, 2024, and forward. Another highlight which came after year-end, but we want to put this into this room is a very large and very strategic collaboration with Janssen where we are going after very, very important therapeutic areas. The endorsement of the European Investment Bank to give us a second time a large loan should also not be neglected, it also was reported after the period ended. On the lowlights, it's very small, the number here, and we of course have to highlight that the discontinuation of our P2X3 program as one of our portfolio assets in women's health was something that we didn't like, didn't expect, but we have clearly already digested in our operations. When it comes to increased costs from energy and materials, this is nothing that was in our control, but of course, on the operations we suffered quite significantly from this effect in the first half of 2022, and we have corrected here many situations in the second half of 2022, which also led to a much better Q4 as you have seen into a good start into 2023. And the slightly slower anticipated ramp-up of J.POD in the U.S. should not worry anyone because we feel fully on track with this operation. When it comes to our Page number 8, you should see that this was an amazing year also when it comes to our growth profile and also our profitability profile. Because this was the 13 year of continued double-digit growth and we feel this is a great achievement because the excellent influences were clearly not all in our favor. And it also feels great to already now be able to say that there will be a fourteenth year coming with strong double-digit growth. And if you take our Q4, many indicators and Enno will speak to that are going really into the right direction, despite a very grim biotech environment when it comes to current funding situations out there. Page number 9 shows you our initial guidance for 2023 where you see that we clearly are committed to grow steeper on our bottom line than on our top line and both will be double-digit growth figures. Nevertheless, we are not compromising on our R&D commitment, which will be still in the range of 70 million to 80 million, which is where we see our projects getting started and then rolled over into strategic partnerships also in the future. Many people ask us how does this fit into your Action Plan 2025. Here, never forget that J.POD will only show their initial contribution to our top line and bottom line by the end of 2023, beginning of 2024 and were J.POD number 2 will go online by the end of 2024, beginning of 2025. So, that's why there will be a step function coming into our top and bottom line with this contribution where the negative contributions will be gone and you will also see a step function in many of our milestone bearing collaborations into the year 2024, 2025. With this, Action Plan 2025 is fully on track. And if you look at Evotec, do not only look at the short-term numbers because the royalty pool that we are building into the future and the massive milestone pool that we are building into the future is growing every day. And it's of course a great pleasure that today another 4 billion in milestone potential was added and another royalty cascade of a huge portfolio that we are building was added by the today announced CNS collaboration together with our long-term partners BMS here. If you continue in this presentation, let me guide you a bit deeper into our focus areas. Building a company that is ahead of the curve nevertheless means that we want to stay and will stay very focused on where we can win. We have defined four areas where we can win in the global competition in building a leading company. The first area is what we call PanOmics. PanOmics stands for deep disease understanding for effective therapies. The second area are iPSC based cell therapies, where we create off-the-shelf cell therapies based on induced pluripotent stem cells, which ultimately will be not only manufacturable, but also affordable cell therapies for wide groups out there that need cell therapies. Just – Evotec Biologics is a start into creating access for many more patients with more precise antibodies and biologics than ever before. And our end-to-end shared R&D platform is representing the shared economy of research and development for all technologies and tools that partners in the industry need. Page number 14 illustrates you this portfolio of our offering [even nicer] [ph]. And if you go to Page number 17, and we are diving into the first focus area, you see that PanOmics is already a success now and it's just starting. The future of Omics is beginning now. And when you look back in a few years, you will call this an iPhone moment in drug discovery and drug development when we started to really go to transcriptomics and Omics level to understand diseases better than ever before. It's great to see the endorsement of many partners, but it's even more exciting to see that with this better drugs will be made very soon. An enormous endorsement when it comes to Omics was the first transaction in targeted product degradation that we did and that was then expanded through BMS and us last year. In the noise of the biotech environment, when it comes to funding or when it comes to other things, it was often not clearly heard how big the disruption potential ease of this transaction because here we are finding more [novel drug] [ph] targets than probably anyone else in the industry at this stage. And we are degrading more parts of the largest and most productive library than anyone has ever done. So, the efforts here are enormous and the upside and reward for Evotec with a more than $5 billion deal and double-digit royalties is also enormous. If you go forward, you see and we have announced this today in the morning and that's also the reason why Cord is not here, because he is just finalizing the work plans of our expanded and extended neurodegeneration platform. You see how important it is for us to land and expand with our strategic partners because that's the best testament that any company can get. Creating a partnership for the next 8 years and with this creating a second alliance that goes into the 2030s, which we have done with targeted product degradation and which we have done today with neurodegeneration shows you the full commitment of two partners to build a portfolio, which will be world-leading. Eight years of full commitment, eight years of efficient teams, eight years of the best platform will generate also [in] [ph] neurodegeneration an absolutely needed novel pipeline of products. Page number 19 shows you that great deals come from great people and it is absolutely appropriate to thank Cord, especially on this one, and it's also appropriate to thank Richard Hargreaves on BMS side, especially on this one because it's their scientific vision now coming into product stages very soon. Why is this so important? You'll see this on Page number 20, because we all, as we are listening, into this call, should see that the burden of neurodegenerative diseases is increasing with age. We will get very old, but we want to get old and be healthy. And with this, creating here novel interventions for neurodegenerative diseases is absolutely needed because you know that the pipelines are empty or are only very, very symptomatic and not effective treatments. When it comes to the how are we doing this? On Page 21, you should see that our industrialized iPSC platform is in the heart of these efforts and this is combined with our molecular patient databases and then creating completely novel drug targets where we can predict much faster than anyone else, which targets will have higher probabilities of success if we bring them forward because they are human derived and not like in the past, most of these drug targets were only tested and derived from animal data. If you put this in context on Page 22, I think we can all appreciate that the whole industry is getting more excited about CNS again, but leading here the industry with the best technologies and with BMS creating a new therapeutic area is of course absolutely essential for us to build this franchise even broader in the future. And when I say broader, we want to also go outside of neurodegenerative diseases here with our iPSC platform and our molecular patient databases. If you switch to the next focus area, iPSC-derived therapies. I think we should all appreciate that this is the beginning of iPSC-derived therapies that are affordable and that can be widely used. This has been so far really the bottleneck in the industry and with this, we also are expecting here quite a big renaissance in the next years to come for cell therapies, especially when we can create off-the-shelf therapies that will be manufacturable and affordable. Talking about manufacturability, the product is the process when it comes to biologics like this. And with this, the piece of the puzzle that we have added with our Modena facility to being able and create here manufacturing processes that follow the biology, we are absolutely leading the industry when it comes to an end-to-end solution for iPSCs. On iPSCs and on cell therapies on Page 26, you see that we are building a comprehensive portfolio where our partnering efforts have just started. So, you can expect much more efforts in our partnering world to come. And now with having a biology understanding into a manufacturing solution, you can imagine how well-received this offering is in industry and Janssen is of course one partner that we are very proud of in this context. Coming to Just – Evotec Biologics, I think we have made it very clear that we are fully behind this effort. More so than ever today. Why? Because access to biologics is needed and will be even more needed with the many biologics to come in the future. And therefore, we are feeling quite comfortable at this stage that we will meet and maybe overachieve our close sales guidance that we have given ourselves for the end of 2022, where we said, we're going to be above 100 million. We are in multiple discussions at this stage with public institutions, with innovative biotech, with pharma companies, also with biosimilar companies, and we expect here our portfolio of partners to grow quite nicely in the near future. This is important because on Page 30, you see that our CapEx spend, which has to be before bringing customers into our J.POD is, of course, ramping up, but it was always clear to us that this will be a start-up phase, which will be volatile and which we will then see coming to the market by the end of 2023, 2024, 2025 quite substantially. Our last focus area is our end-to-end shared R&D platform. And let me convince you here only by numbers on Page 32. Having more than 800 partners on our platform at every moment in time is justifying when we say that we are the basis for the shared economy in R&D, even increasing our repeat business from about 90% to 92% in 2022 shows you that customer satisfaction is what matters at Evotec. And showing you also that we are creating an even larger number of partners where we are going deeper with more than 1 million in revenues is giving us a very good portfolio effect in many regards. Page 33 shows you that we believe in this megatrend. And we are leading this megatrend with a high quality growth if you look at the global market for [variable] [ph] cost. And let me comment here for a second on the biotech funding crisis. Many biotech funding situations are today really driven by the fact that biotech companies understand that they are better off in working with Evotec on the basis of variable costs, then building fixed costs. So, we are the answer to the biotech funding crisis. We are absolutely not suffering from this problem at this stage. And with this, let me hand over and give you context to our financial performance of 2022. And again, Enno, this will be your last presentation in this context. But again, it's beautiful to see you presenting the best numbers of Q4 ever.

Yes, that's my great pleasure. Thank you, Werner presenting record numbers actually regarding Q4 of Evotec, which was the strongest performing quarter ever under 30 years history of Evotec. Welcome everybody to the call also from my end. And it's a great pleasure and I'm very pleased to report our financial performance for the 12-month period ending in 2022. And let me start on Page 35 with a brief overview of our preliminary numbers before I break down into more details on the following slides. Compared to the previous year, the group revenue increased by a strong 22% to €751.4 million surpassing our upper revenue guidance by over €15 million. And this significant growth was especially driven by our very robust base business. Favorable FX efforts provided additional tailwinds, adding €40.6 million to the revenue line of Evotec. On the other side, we did see a decrease in milestone revenues of 31.4 million, compared to the previous year 2021. The gross margin amounted to 23.2% in the 12-month of 2022, leading to a decrease of 130 base percentage points compared to the previous year. And this decrease was mainly due to the increasing cost of Just – Evotec Biologics manufacturing and the lower contribution of milestone revenue as just indicated. Additionally, inflated energy prices, more expensive materials, and increased logistics costs had a negative impact on the gross margin, as well as Werner already mentioned. Unpartnered R&D increased by 21% from 58.1 million in the previous year, up to 70.2 million in 2022. This is again a testament of our commitment of investing in Evotec's capabilities to improve our efficiency and precision medicine platforms. And that said, compared to our guidance target, the result of the unpartnered R&D costs is still at the lower-end of our guided range of €70 million to €80 million. Regarding our ambitious EBITDA guidance, which was set between 105 million and 120 million we report a like-for-like adjusted EBITDA of €104.1 million. This result was driven by a well-balanced development between our favorable growth and expansion versus profitability of Evotec's base business. However, significant investments to further increase the high potential of Evotec's Just J.POD had a negative impact on the EBITDA outcome, as well as a lower milestone contribution pointing to the same direction. In addition, strong headwinds from an inflation perspective were a challenge to our EBITDA, particularly in the first half of 2022. Eliminating the expenses, which occurred in context of our M&A activities, and the EBITDA contribution from our latest additions, namely Evotec Modena and Evotec DS, and Halle, Germany which totaled 2.5 million. The M&A adjusted EBITDA like-for-like improves from €101.7 million to €104.1 million, which I just mentioned earlier. For transparency and once again pointing out the strength of our very healthy base business, the exclusion of the financial performance of Just – Evotec Biologics would lead to an outstanding EBITDA resulting into an EBITDA of €138.3 million for the full-year 2022. Looking at Page 36, this slide depicts our excellent revenue growth of 22%, which was spread across the majority of our business units and there of 15% resulted from organic growth of our group revenue at constant FX. Consequently, an important factor and the achieved revenue growth were FX tailwinds of roughly 6.6 percentage points and adjusted for Just J.POD related group revenue standalone grew by 24%. Just looking at the base revenues, these increased by an impressive 30% and once again confirmed the growing demand by our existing and also new partners. While we experienced a decrease of our overall gross margin, the gross margin, excluding Just – Evotec Biologics would actually increase from 28.4% to very firm 31.1% therefore exceeding last year's gross margin by 2.7 percentage points. And this also despite reduced margin strong milestone contribution, as well as inflation headwinds. Considering all these challenging environments and factors, the outcome of this year's 2022 numbers deemed as highly satisfactory. Looking at Page 37, this slide highlights our already anticipated very strong EBITDA outcome for the last quarter of the year. In Q4, the EBITDA contribution was 57.1 million, which was largely driven by milestones, upfronts, license, and royalties. Again, the significant growth factor was the excellent development of our base business, including a very strong operating leverage. And last, but not least, a very strong quarter of Just – Evotec Biologics also contributed to the outstanding Q4 EBITDA. Major factors for the positive development when excelling operating leverage, as well as some royalty related revenues, as Werner just indicated earlier as well. Adjusting for Just – Evotec Biologics, we would be looking at a very dynamic growth rate of 34%, comparing Q4 2022 versus previous year Q4 and 2021, which was already also a strong quarter. Like the previous slide, the slide – Page 38 further underlines the exceptional Q4 2022 performance being the strongest quarter in our history as I mentioned before. The revenue growth was 29%, compared to an already strong Q4 2021 and this exceptional achievement was supported by a milestone contribution of €12.3 million in that quarter. The gross margin in Q4 increased to 34.4% being 6.5 percentage points higher than in Q4 2021. The most significant factors or most significant factors shaping this great outcome for Q4 where the achievements of milestones, upfronts, and licenses, royalties from SK Bioscience, a very prosperous development of the base business and a strong performance improvement of Just – Evotec Biologics in the final quarter of the year. And despite massive pressure on the cost side, due to inflation and ongoing investments, the EBITDA in Q4 could be improved by 53% overall versus Q4 2021. Eventually, 52% of 2022’s EBITDA has been posted in Q4. The net result was once again influenced by the volatile share price development of our shareholding in Exscientia as the main factor driving the net result here. Moving to Page 39. This overview slide summarizes the main balance sheet and also cash flow KPIs of 2022, compared once again against 2021. Overall, the balance sheet remained roughly stable with a total north of €2.2 billion total assets or total balance sheet. And with an equity ratio of 52.6%, we remain with a very solid basis for future investments as it provides us with considerably financing flexibility to drive our growth trajectory in case this would be needed. It is important to note that the decrease in the equity ratio is primarily attributable to the fair value adjustment of Exscientia shares, which amounted in total to an adjustment of minus 175 million in 2022. The operating cash flow totaled €203 million, exhibiting a more than 80 million increase compared to the prior year. And a significant event was the receipt of the US$2.5 million payment from BMS in the first half of 2022. Moreover, the net debt ratio of minus 2.0 adjusted EBITDA factor also underlines the solid financing basis and a lot of headroom for financing flexibility if needed. Evotec's liquidity position of €719 million builds the platform to further pursue our very ambitious growth and investment strategy. CapEx in 2022 amounted to €181.4 million and included a significant portion of side expansions. For instance, 58 million have been invested in J.POD Europe or Toulouse to be more precise, 50 million in our J.POD U.S., as well as another 86 million to expand our sites in Munich, for instance, Alderley Park, UK; and Abingdon, Toulouse and Verona in Italy. In addition, almost €60 million were invested in new and existing equity investments and also minority shareholdings and €23 million for the acquisition of Evotec Modena, as well as Evotec DS in total. And with this, this completes my financial overview. And therefore, I will hand back to Werner, but before I do so, I would like to in particular today here on this call thank the audience, our investors, our shareholders, our analysts, and the media who accompanied us over the past years and where it was always a great pleasure interacting with you and being in touch with you and I hope we can continue to do so maybe one-time. Let's see. Thank you very much for your trust. And for the interaction and communication we had. I'm handing over to Laetitia from next week onwards. And I'm very grateful having had a great experience over the past almost seven years being on this tremendous journey with Evotec together with my team, with my colleagues, and also obviously the management. It was a great pleasure and therefore thank you a lot for having this opportunity.

Thank you, Enno. Let's come to the final part of this presentation by first on Page 41, reiterating our Action Plan 2025 as already stated. If you go to Page 42, you see that it is essential to build a growth company with a growth culture. And with this bringing at this stage about 500 new talents into the company in 2023, we also committed to not only build the culture, but also build the prospect for these new talents to come to stay and be motivated to see a long-term future within Evotec. And if you go forward, on Page 43, it is increasingly noted also by the outside that we keep our promise when we talk about ESG and sustainability. We want to make our contribution not only to patients, but to the whole planet. Everyone can start here, everyone can contribute here and we want all our employees in the outside world to realize that we take this as a very, very strong commitment from the whole management team into the whole organization. So, you see listed here our contributions to environment social contributions and also our commitment to best of all governance. If you go to the next page, you also see our promise will continue and accelerate when it comes to ESG goals in 2023. Why is this important because we want to have here a full understanding for growth. And with this, we also want to have, for example, a full understanding of our talents everywhere where Evotec is working with, for example, highlighting here the interaction through an engagement survey in 2023. When it comes to our news flow in 2023. And if you go to Page 45, it's great to see already some ticks made, despite the fact that it feels like the year has just started. So, you can expect a lot from us when it comes to PanOmics, our first focus area, when it comes to iPSCs, our second focus area. When it comes to Just – Evotec Biologics, our third focus area, and when it comes to our end-to-end shared R&D platform, our fourth focus area. We are just beginning when it comes to the year, but we are just also beginning when it comes to the long-term vision of Evotec. And with this and on Page 46, let me thank you for following us. Let me thank you for all the questions that we hope to receive. And I'm here together with Matthias and Craig, and Enno and the whole team to answer your questions as you are hopefully pushing the button now. Thank you so much.

[Operator Instructions] The first question is from the line of Zoe Karamanoli with Royal Bank of Canada. Your question please.

Hi. Thank you for taking my questions. Two questions from me please. First one on Just. How much capacity current projects utilized, and of these, what proportion is late stage preclinical versus early stage preclinical? And how many more customers you need to have before you expand capacity on Evotec Just? And maybe on the number of additional customers, it would be helpful if you can comment by the development stage? As a follow-up, is there an ideal split between how many customers' projects you need to have at each stage of development? Thank you.

Great. First question goes to Craig.

Thanks for the question, Zoe. So, in terms of capacity, it's important to remember that we're still in the build-out and ramp-up phase and the whole design of the Just – Evotec Biologics concept is to be modular in its expansion opportunities. So, we are not fully utilizing the full buildout as it stands today. But in terms of the sales profile you've seen at the end of 2022, a lot of the sales that were completed in 2022 feed through the revenue in quarter four and indeed revenue into 2023. In terms of how many more customers we need before expanding, I think maybe the number of customers is maybe less important than the magnitude of the demand. If you like. And therefore, to your point about business mix, it's very important to recognize that the nature of the demand also lands on the facility in different ways. So, first in mind batches, for example, take about 9 months to complete and land into manufacturing. Longer-term preclinical process development moving into manufacturing at later stage span multiple phases and use different parts of the facility. And the key thing is that we can expand capacity in a modular fashion in a timely manner to meet the dynamics of that business need. That's exactly the concept of Just, that's exactly why it's very agile in its approach.

Great. Thank you so much. Next question please. Zoe, was there a follow on? Sorry to interrupt you. No. And let's go to the next question.

Next question is from the line of Peter Verdult with Citi. Your question please.

Thank you. Peter Verdult, Citi. Werner, just three questions please. Could I push you a little more on Just? I know you said, you don't expect to reach breakeven this year, but can you give us some quantification as to how near to breakeven you expect to be by end 2023 and what gives you the confidence capacity utilization will ramp up in the current year? Second, you made some comments, which I think were interesting during your prepared remarks. Just, can I just push you a little bit more in terms of what you're seeing and hearing from your new customers? I mean, it's pretty clear that the CMO players are breaking themselves for a tough H1 and Q1 and those customers destock. But just wanted to push you a little bit more for your perspective from your vantage point? And then lastly again on your guidance, you talk about new clinical trials and partnered assets entering the clinic, [indiscernible] was obviously a disappointment for everyone, but can you just pull out maybe one or two assets that you're particularly excited about that fit in that bucket in terms of new clinical trials or part of the assets? Thank you.

So, on Just and the market situation around Just, I'll hand over to Matthias. On – when it comes to what we hear from partners out there on Multiple dimensions, I understand the second question in this direction. I'll hand over to Craig. And when it comes to partner assets, for example, I want to call out our neuro asset that comes from our iPSC platform that is partnered with BMS where Phase 1 has been conducted where we see precision medicine at its best happening and that's just one where I think we will see a lot of just putting into a drug what we always have been seeing as the potential of these platforms. And that's why I think these are then the points where the validation of the platforms will come with the validation of the data points once we make them public which as you know is in the hands of our partners. And other assets, I'm increasingly also excited about, for example, an asset that we have still in the pre-clinic in virology, which will go forward, which is funded. I'm very excited about multiple projects still in our collaboration that we are running with Bayer. I'm also quite excited with, for example, assets that we will make visible coming out of our partnership that we have initiated with Lilly, Janssen Novo Nordisk. So, there is just a lot ongoing. I think that's the good news, but – and I understand the disappointment here, we will always only call out these assets once our partner will show progress. To give you another example here, Sernova, our partner in diabetes will, for example, give a poster presentation in June where they will show how their device together with ourselves is operating in the preclinic and can then make clear judgment of how this will go forward in the clinic. Coming back to the first question to Matthias.

Hi, Peter. It's Matthias Evers. Thank you for that question and that [nudge] [ph]. So, to offer you a little bit more on the Just situation. So, from today's pipeline, from the order book situation and the capacity context, so where we look at J.POD in Redmond at this moment of time while we build our capacity. As mentioned by Craig before, over the full-year, we don't expect breakeven on a full-year basis as you also noted. I mean, what I can say is, I mean, we expect double-digit growth on revenues. We expect overall lower losses compared with last year with 2022. And I think we stand behind that be a breakeven in the last quarter. That's what we can say at the [small enough time] [ph].

And to the second question, maybe Craig, if you want to comment.

Yes, sure. Thanks, Peter. So, the question I think was around what the vibrations we're getting in the market and from our partners around the context. It's certainly true that, of course, we're in very close contact with our partners and we hear some cautionary notes, but at the same time, we have a fantastic mix of partners biotech, government, not for profit, big pharma as you've seen even today. And that business mix then very much protects us from one area or one segment finding it more challenging than another. And then I think it's absolutely true to say that – to reiterate what Werner said, one of the advantages in working with us is that the flexible capital efficient we are working with has an increased probability of success that comes with working with us puts us as part of the solution to the challenges rather than part of the problem.

And if I may add? Precision tools like transcriptomics, proteomics, PanHunter, this is not commodity in the industry. And that's why Evotec is such a differentiated partner because the moment today someone understands that there is a precise way of making a drug or there is an old fashioned way of making a drug, people just want to work with the precise way of doing this. And that's why, again, I think we are a bit better positioned here than many other players in the industry and that's also rewarded by our partners. And that's why, yes, there's a very grim funding environment out there. But when you have a differentiated offer, offering I think you are, kind of really putting here yourself into a different category.

Thank you very clear.

Pleasure. We can go to the next question please.

And the next question is a follow-up from Zoe Karamanoli from Royal Bank of Canada. Zoe, your question, please.

Yes. Hi, sorry. You [didn't hear] [ph] me earlier. I wanted to follow-up on the question just to clarify. Around the business mix in terms of marketing to you or demand for just. What I was after is, could we then assume that, do you have like a guidance in terms of how we should think about the number of projects? If it's like two projects that are similar to Alpine and [DoD] [ph] that we need to see you sign in FY 2023 to reach that capacity? Or is that not the case 10 smaller earlier stage projects that will reach that capacity? Thank you.

Great. Question goes to Matthias.

Thank you very much for that question and a little bit similar also to the question raised early on by Zoe. I mean, our goal is to build a portfolio. I mean across the stages from discovery to development, clinical supply to manufacturing and also across the types of customers and partners we work with. As you mentioned, the DoD as a disclosed partner, I mean, public biotech or pharma. And I cannot comment on the exact numbers. It is important to build this portfolio. We have significant learnings of the history of Evotec as we build portfolios in different businesses long value chain. So, we will inject that. But the important message is here that various stages of the value chain need to be reflected. So, that's why we build a portfolio. And we are certainly focusing on developing sizable projects as we have disclosed for instance with [DoD Partnership] [ph].

And maybe to add. The portfolio that we need to generate is already with identified partners at this stage discussed. So, it's not a question. Is there anyone out there who we don't know today? It's that we know exactly. That there are identified partners with identified projects. If that whole mix then comes together, that's a separate topic, but we know who we talk to.

If I can just add one other comment, it's Craig again. Understanding the question perhaps in a different way, if you're asking, is there a particular mix of work that needs to come in because the facility has restrictions or constraints? That's exactly important to understand that we can do either a large number of small projects or one massive project using the same infrastructure and the same facility in a very flexible and agile way. That's actually part of the concept.

Great. Thank you.

Good. Next question please.

The next question is from the line of James Quigley with Morgan Stanley. Your question please.

Thank you for taking my questions. I've got three, please. So, the first one is on the guidance. Could you give us a little more color on the component parts here, please? So, your constant FX guidance implies around about 11% to 14% growth year-on-year. So, as it stands with Matthias mentioning that Just Bio should see double-digit growth as well. It implies a bit of a step down in growth for the base business. So, what are you assuming here in terms of the base business Just Bio and also milestones? And if growth is expected to step down from that 30% that you highlighted earlier, what are the key factors driving this? Then, on the proprietary R&D spend, it was told the bottom end of the guidance as you highlighted and you've got the same range for 2023, how should we think about the step up to the 100 million by 2025? Is it necessary to spend the extra 20 million to 30 million if you're still discovering a good number of assets with the current spend and also using your technology becoming more efficient at discovering assets? So, just some thoughts on capital allocation decisions here and how it develops with your portfolio? And then finally, you also highlighted in addition to Just Bio, Evotec Modena, Evotec DS, so you seem to be building out your CDMO offering quite nicely. So, how are you thinking about other modalities here from a CDMO perspective broadening out your offerings? And what is the end goal with your CDMO business because you're going to have – you could potentially have a lot of captive customers, but also with the external customers who maybe don't use your other technologies as well? What's the plan there from a CDMO perspective? Thank you.

Great question. Thank you so much. Let me provide the guidance question put at the end. The capital allocation question is, I think we see a dynamic environment, and in the 5-year plan, which we have disclosed in 2021, we of course will reserve the freedom to invest only in R&D projects and in R&D efforts where we see the opportunity to lead the industry or to generate significant and when I say significant, it's better than [venture like returns] [ph] on an investment that we are making in R&D. And at this stage, we feel very, very comfortable in spending what we are spending. We could of course spend more because the demand on the platform is driven by excellent projects. Nevertheless, there is also a bit of a market uncertainty we had to put what first. So, that's why I would say our 70 million to 80 million R&D capital allocation this year is on the conservative side where data will tell us and also partnerships will tell us if we should increase this because again leadership in transcriptomics, PanOmics, iPSC driven cell therapies and then our end-to-end share R&D platform is absolutely justifying this. If we will need to go to the 100, is a very fair question. And again, that will largely depend on which kind of partnerships we are striking. Because for example, if you see today's neurodegenerative partnership, the 50 million upfront, this now creates within this franchise out of the initial cost center for the search of novel targets, the profit center. And what we then do is, basically shift our R&D efforts to, for example, neurodevelopmental diseases, which if we have capacity, makes absolutely sense to do this at the same time. So, I think we'll oscillate around the number and keep a very open mind here to really invest into high returning projects. When it comes to elements of our guidance is top line that we – I think in [all fairness] [ph], you see also us, of course, being a bit alarmed by elements like the SVP Bank or by elements like biotech funding situations in the U.S. So, that's why on the, I would say, competitive base business, whereas capacity, the main driver, it could well be that we are not growing as fast as in other areas. Nevertheless, I would not call this anywhere near a step down of growth because again, how many companies do you know that are growing 13 years in a row double-digit on both top-line and bottom-line? There, I would rather see what's the allocation of our capacity available as the key constraint that we see. And that's then also for us more a question, which business do we take in and which business don't we take in at this stage? Because it's the opportunity cost of capacity that is driving us here. It's not that there wouldn't be a market demand that we could fulfill absolutely not. And what we are not intending to do is to run for business on the basis of prices that we have to fill the platform, that's not our strategy at all. So, therefore here, I would absolutely not see a step down in growth as you are indicating. And when we come to the elements of our guidance, there's of course one element there, which we don't exactly know how it will come in, which is the number of milestones that we will collect this year, where we expect a higher number than in 2022. That is at this stage factored into the guidance because we have a larger number of milestone bearing collaborations that will come to data points. And that's of course always an element of variability and that I would say started early in the year now with data points that we see there can be data points coming on top of that, but there could also be data points that fall away from that. That's why you see here probably a very balanced first guidance that we wanted to give. And there was a third question. The CDMO, overall strategy, maybe if I may hand over to Matthias on that question?

The quick answer there on that question would be that we look, I would call it a hybrid model. We see, as you said, I mean, a highly attractive offering. I mean, being, I’ll keep it together on the API side, finished [Technical Difficulty], but we also – Werner has presented that as our focus areas, which is an end-to-end shared R&D platform. So, it's really the mix of the type of projects and the type of customers where we focus on our integrated value proposition versus specifics given all capabilities. In summary, for the time being, it remains a hybrid model.

And there is not a modality planned at this stage that we want to add. It's the opposite we want to win in all the modalities where we are in right now. Especially Biologics. Yes. I think that answers your questions.

Yes. Thank you very much.

Pleasure. Bye-bye. The next question is from the line of [Michael Ryskin with Bank of America] [ph].

Great. Thanks for taking the question. First, I want to ask if you had any comments on quantifying the Bristol Myers collaboration you announced just recently? You had some comments in the PR when that just came out, but maybe you could talk through how that was recognized in 4Q versus 1Q? Whether that's split between execute and innovate and if there's anything else that we should be keeping an eye out for in terms of the 2023 guidance that’s attributed to that. I know it's tough to parse out from the individual programs, but still any clarity here would be appreciated given the size of the deal?

Yes. So, thank you so much. So, first of all, it's an extension and an expansion. So, what you see, for example, in the guidance already had taken into account what was the ongoing collaboration. What you will see coming on top of that is it's an 8-year deal with a 50 million upfront, which we most likely will spread out over the time. Maybe there's a dynamic element in there, but most of it will go over time. So, therefore, it's not very significant contribution to what we have already expected in 2023, but there is a huge portfolio of projects as we are building that are attributed to significant milestones. And when we say 4 billion milestones as the potential, you should always see that on top of that, there's a double-digit royalty that is coming. So, it's not only 4 billion deep potential, it's even higher than that if you would look at the royalties that are attached to that. And this is not milestones that are coming by the end of a product development, these are many of the milestones coming very early on in the projects already. And as you maybe have seen 75 million payment in Q1 already from BMS, this was preclinical projects in lead optimization stages. So, these are milestones that can happen within 1 to 2 to 3 years of the start of a collaboration and that can be significant in the double-digit ranges. That's why we are on especially here the near-term potential of both the target in product and degradation, collaboration, but also the extension, expansion of the neuro collaboration so positive also with an impact on our profitability, which again leads us to that this will be a contributor for Action Plan 2025 EBITDAs. I hope this gives you color. And of course, what we are not allowed to disclose is, how broad and into how many indications we are building this. But as I already mentioned, BMS is building a full therapeutic franchise in neuro and a large pharma company has to think about and also about a large number of opportunity ground that they are building because this will remain an area of also failure in the future. And that's why I think creating a multiple starting point is exactly what we are doing. And given the early milestone components that's where we are benefiting hopefully very much from that.

Okay. Thanks. And maybe somewhat related to that or based on that answer, anything you can tell us in terms of pacing or seasonality as we work through 2023 as you called out, you typically have a higher 4Q and sort of the year builds as the year goes along, but I think 2022 was a very exaggerated version of that, 3Q to 4Q step-up. So, anything you could tell us in terms of how we should be thinking about 2023 progressing just as far as the visibility you have now?

So, there were not many people who believed when we reported Q3 numbers that we're going to be above 100 million EBITDA so far to seasonality. We absolutely hope that this will not be the pattern of this year. Again, I think we see always the pattern of the second half being stronger than the first half, especially also when it comes to milestones. It's just the nature of how R&D projects are timed. Having said that for Q1, we see a strong start. In 2023, so that we are also here comparing what we see, and I don't have numbers now, of course, is clearly already guiding to this double-digit in Q1 growth. And when it comes to the seasonality you also should see that last year energy prices really hit us in the first half. Quite hard and unexpectedly. So. supply chain costs came in also in the first half quite heavily. Counter effect was FX as you know. And I think we did a very good job and thanks to the whole team in price adoptions in the second half, so we should benefit from this in the first half of 2023. I think the overall message is, it should be much smoother than 2022 when it comes to seasonality for 2023.

Great. And if I could squeeze in one last one, possibly, just on exactly what you're just touching on now, some of the macro factors, some of the inflation energy factors that hit you in 2022, especially in the first half of the year. Just to be clear, how much of that continuing or sort of lingering into 2023 is in your outlook now? I guess what's your expectation for inflation, wage inflation, cost inflation that's built into the outlook now, consistent with current levels worsening improving as the year goes on? Could you just give us a directional sense for that?

No, I think what we have ended Q4 and we have taken this more or less as the current view and put this into our expectations. So, if there are anomalies or external shocks like the [SVB Bank] [ph] or banking crisis or another war and things like that, we have not planned for extreme scenarios that could be the negative surprises. There could also be easing for example, on energy costs, but we have not baked anything like this at this stage into our guidance.

Thank you. Thanks.

Pleasure.

The next question is from the line of Steven Mah with Cowen. Your question please.

Hi, great. Thanks for the questions. I have two on Just Biologics. First question, and apologies if I missed it, but did you disclose what the CapEx is for J.POD Redmond and Toulouse for this upcoming year? And then second question, it's a follow-up question on what we've discussed previously, but just wanted to dig a little bit deeper with regards to challenges in the marketplace. I know Q4 Just Biologics was very strong, but how are you thinking about the Just Biologics pipeline given you have the outlook of a possibly longer macro issues? And are there any, are you maintaining the cost and expansion timelines for Toulouse and additional expansion on Redmond? Are those still intact or what are your thoughts of keeping the timelines versus a slowing expansion? Thank you.

Yes. So, the CapEx question will go to Enno and maybe to give you a bit of color on how we think about build-out and other capacity elements and what we see in the market? I'll then hand over to Craig again.

Good. No, pleasure. So, the CapEx maybe just for 2022 on both together was in the range of roughly 75 million, obviously there is the [main weight] [ph] in 2022 already being with the German – over the European Toulouse based J.POD close to 60 million CapEx. And for 2023, for these two, in particular, again, the absolute heavy weight going into Europe now as this is the active building phase will be above €130 million. That's what we're currently expecting.

Great. And on the – hi, Steven. On the capacity build out and so on, we are fully committed to the biologics focal area. We're continuing the build in Toulouse as per plan, so we are fully on-track and indeed continuing to expect that J.POD 2 in Toulouse will come open in the second half of 2024 and there's no way top of the timeline for that or the plan. And of course, as we said before already in the call as well, the real – one of the real advantages of this whole system is that it's actually quite flexible and can be dynamically adjusted as the business demand comes in and the shape comes in.

And please never, never forget, we are not investing with Just – Evotec Biologics in the capacity build-out for Biologics, which is ongoing from many, many players out there. We are building a paradigm shift in Biologics for more precise drugs that can be manufactured in a more flexible way at totally different cost of goods when people are shifting to continuous manufacturing. So, that's why please never mix up that this is not a capacity play. This is a paradigm shift that we are creating. Sorry for being so emotional on this one. But it's not needed. Thank you so much. Any other question?

The next question is from the line of [Douglas Tsao] [ph] [Technical Difficulty].

Hi, good morning and thanks for taking the questions. Just a quick one for me. Obviously, a point of conversation today has been the current funding environment for biotech, especially in the U.S. I'm just curious, has that led to any, sort strategic or tactical changes within the company? Or is it a function of just trying to obviously, you're continuing to enjoy great success. So, there isn't a need for a significant pivot to, sort of take a wait and see attitude. Thank you.

So, I think I can disclose without naming numbers. I've seen the initial build-up of, for example, the funding reports that large consulting firms are making and that they are presenting in June of this year. This will point to a very grim picture of last year, which we all felt, but it will be confirmed by these numbers. Nevertheless, these numbers, if you look at them at the long-term trend, don't fall significantly below 2018, 2019 numbers. And that I think is important if you look at the long-term trend and if the industry really from an overall funding perspective, stabilizes around to 2019 numbers and then sees a comeback in the industry because of data that is also coming on top of the need to build pipelines, then I think that could be the situation that we see the worst very soon in the funding environment. We have seen the worst very soon in the funding environment. I don't think it's over, but I think it will pass away like it has been in the last 20 years that I've been in this industry always been a cyclical situation. Don't forget the large venture funds have raised significant capital in the years 2019, 2020 and they want to deploy money, don't forget many private equity players have entered the scene and are now exploring this sector for opportunities, don't forget that we also see many public initiatives to wake up in the sector and build and invest into this segment here. And small signs of optimism we see from [funding rounds] [ph] that are happening again. And the good news here and I don't like to say it that way, is that finally, many of these funding rounds have started to happen in the private environment at lower valuations, significantly lower valuations than in the past. But money flows on the basis of lower valuations again into the great scientific endeavors of early companies. And that's I think a positive sign, which is of course not good for variations of these companies, but it shows that many people are starting to do this. We can also testify to this because as you know Evotec has an exposure to more than 20 smaller companies where we are co-owners. And there we see quite positive movements of term sheets coming in again of us on the table for converts end-to-end. So, I don't know if this helps you to see the color that we are seeing here, but again, it's not over, but there are many signs in the positive direction. And the consequence for us in building Evotec has always been to create a differentiated offer for our partners. And with this people are not coming for us when it comes to and a non-differentiated experiment, people come to us if they want to have the best precision medicine experiment that can be made or the fastest turnaround of an experiment that can be made. So, that's why our overall strategy with regard to the funding environment stays fully intact.

Great. That's very helpful, Werner.

Pleasure. Maybe we go to the next question.

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

Hi, thanks for taking my questions. I've got three left. First of all, just with regards to the Just Biologics business, I wonder if you – you said, you've identified a number of partners and projects. I wonder if you could just outline either what are the main points of contention or points of due diligence or main stumbling blocks, I guess, for those partners getting them over the line or perhaps equally for those that haven't decided, what has so far been the main reason for customers electing not to indeed convert into signed customers for just Evotec. Just try and give us a sense of, I guess, what it is that – the help your partners are looking at this business? Secondly, then just with regards to the customer mix. I mean clearly there is, if you, I think I'd rather say, if you look at the percentages this year versus in the past, there's clearly increasing amount of revenues from biotech, I guess, a decreasing amount of revenues from the top 10 customers, a more diverse revenue base, which you guys all make sense given what we're seeing. Did do you think that's going to reverse, I guess, or in fact, is there a conscious effort to perhaps try and reverse that somewhat given obviously what we've been talking about for a length so far with biotech funding or do you think that's just a way of the industry and the nature of Evotec and what you can provide your customers? And therefore, that sort of diversification of [indiscernible] is unlikely to reverse over the next few years? And then thirdly, perhaps slightly bizarrely and apologies if this is completely off base, but the recent things we've seen to do with non-human primates in the U.S., the challenges there, has that got any impact at all on Evotec’s business? I guess either positively or potentially negatively in terms of the limitations that there are there? Thank you.

Great. Actually, all three questions are market driven and business development driven. So therefore, I would point with the first one and the second one definitely at Matthias and the third one, maybe Matthias and Craig, if you both can comment on that?

Okay. Thank you, Peter, for those questions. And let me start with question two, one and then I'll start on three. So, the customer mix and what you are seeing, the short answer, it is not just happening. So, given what we observe with SVB, I mean we are, of course, inside the process to look very carefully and thoroughly. What choices do we make, with whom do we make, and you have to think about it would take us partnering with the whole shared R&D economy, with the full profile of players from start-ups at the very early days all the way to big pharma and to public organization. So, we make conscious choices. And as you observed roughly a quarter sits in biotech, much smaller portion of that in the U.S. So, we feel quite good about the mix. Absolutely, it's somewhat reflecting whose innovating in the industry, but I want to just to confirm that we look at this mix and [indiscernible] it very carefully. Your interesting question on Just, let me use this opportunity to remind us here a little bit about our value proposition because in that light, it's much easier to explain, as you ask the question, who says no to and why? Our value proposition is indeed a value proposition of a paradigm shift that's going because we offer an AI, artificial intelligence with generative models actually, plus continuous manufacturing, a highly flexible option where we can accelerate the process development, get directly into commercial supplier and offer a very attractive [cox position] [ph]. Now, this is very appealing. This led us in the last year to a tripling of the closed sales, as you have seen. We are working on that pipeline, expanding that pipeline. And typically, we have a high hit rate when it comes to entering this pipeline. So that's for instance, the case was first in-human trial for supply. But we are also in feasibility projects working on projects that are in the later stages, commercial stages, the other data has to tell us. So, specifically what people say no to, I think people, the data should tell that. We are in the process because value proposition is attractive in a world of IRA, cost constraint, in a world of providing access to biologics. This is an important proposition. And in short, we have maybe some partners who are not attractive to that, but whoever is attracted is then going into feasibility studies and then to come a data driven answer. On your third question, non-human primates. I can confirm we work on non-human primates. We don't have the issues that are also in the market. And we are called open for business to expand our efforts in this space and look forward to the year. But Craig, from an operations perspective, maybe you want to add something there.

Yes. Thanks, Matthias. Yes, As Matthias said, the [NHP supply] [ph] in Evotec is secure and very high quality. So, we don't have any negative implications of some of the recent reports and acknowledgments you'll have seen in the press for other parties. But perhaps the one thing to acknowledge and [indiscernible] is that these events coupled with the regulatory environment to really move the industry towards three Rs, replacement, refrainment, reduction and indeed ultimately with an ambition to phase-out animal use and safety prediction in particular, brings up potential very strong driver to our technologies in the predictive science and PanOmics applications to safety assessment. This is an area that we feel we're very strong. And investing heavily in R&D and building capabilities. And therefore, we are fully committed also to that whole alternative future of medicines discovery and development using much more refined human orientated and predictive PanOmics tools for safety assessment and future predictions.

So Peter, if I may add, if you look at the FDA Modernization Act 2.0, I think we see a very strong trend and a very strong [bias] [ph] to our offerings in this one, because I think we all understand that we want to go away from these tools and want to really shift here to much, much more modern Omics driven technologies and that's what Evotec is offering. So, I think overall, this is a transition phase of non-human primates into modern phase. It will be not a fast transition that's clear for greater reasons, but we are leading the transition here.

That's great. Thank you. [Indiscernible] question as well. Thank you.

Great. And next question please.

The next question is from the line of [Joseph Hedden] [ph] with Rx Securities.

Great. Thanks for taking my questions. Congrats on the results and the extension of the newer deal. Questions related to the TPD, targeted protein degradation deal, you previously highlighted the, kind of important and growing element of FTE rates there as a, kind of high margin contributor to the base business. I'm just wondering if I get a hand on the human element. So, how many employees are now working on the collaboration? And with this 75 million in new payments, what does the growth in personnel there look like? Thanks.

Yes. It's a great question because it probably also highlights how significantly larger our effort when it comes to proteomics and targeted protein degradation is then many of the absolutely great, but small efforts in the industry are. And if you would look at the whole Evotec proteomics platform at this stage linked to targeted protein degradation together with BMS, you would have more than 200 people. You would have more than 40 mass spectrometers and you would have this fully operational on terabytes of data that is unparalleled at this stage in the industry. I don't give you more specifics on this one, but it shows you that it's a massive effort and again it's an effort which hasn't started and is ramping up now. This has been started already 3, 4 years ago has come to its full swing and is now generating faster more data than ever before, again, with more than 200 scientists on this deal only. And it's in our hand and in our flexibility to staff this deal because it's our control of how we generate this data. And that's why we of course are cautious to keep this a profitable transaction at every moment in time, but truly profitable is when we are achieving milestones, [subject collaboration] [ph]. And that's why there will be variability from quarter-to-quarter, how much effort we put behind it. But if it stays as productive as it is, it will be profitable at every quarter at a significant level.

Okay. That's great. Thank you.

Pleasure. Next question, please.

Next question is from Falko Friedrichs with Deutsche Bank. Your question.

Thank you very much. I have one question left and that is on your BMS partnership. Can you provide a bit more color on progress in this compound that is in Phase 1 currently? And when do you expect the first clinical readouts there? Thank you.

Unfortunately, I'm not allowed to give you color on this one with the exception that I think we will – we know a lot about this compound, but we will never be able to disclose anything without the permission of our partner.

Okay. Thank you.

Sorry.

And the next question is from the line of Christian Ehmann with Warburg Research. Your question, please.

Hello, everyone. I want to circle back to your Janssen Corporation. Given that Janssen has terminated its cooperation with Fate Therapeutics just the week before you announced your plans. I'm a little bit curious about the potential added value you can give and maybe can give us some data points what do you think you would be able to add this collaboration with Janssen? I'm thinking about, especially your immune surveillance [indiscernible] technology? And maybe also a little bit of an idea and how should we expect this program to proceed in the future?

Thank you. This is a great question, but I'm very sorry that unfortunately without permission of our partner, we cannot disclose anything outside of what we have disclosed on this partnership at this stage. I'm sure that there will be news coming, and we are happy to share this thing with you. But at this stage, unfortunately, we cannot.

Okay. Thank you very much.

Nice try. And with this, I’m looking around in the virtual room and I'm asking for final questions if there are any, if there are none, then let me first thank you for the excellent question. Let me thank you for following us. Let me thank you for staying and keeping up this sector, which has seen easier times than before, but this sector will come back with best of science because it's happening as we speak. All the very best and I hope to see you soon.

If I may, we have a final question. No, it's gone. Sorry for that.

Thank you. That was indicated here on the platform as well. Great. All the best. Bye-bye.

Ladies and gentlemen, with this, the conference has now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.