Evotec SE [EVO] Conference call transcript for 2022 q3
2022-11-12 15:10:28
Fiscal: 2022 q3
Werner Lanthaler: Good morning, good afternoon. Welcome from Evotec. Welcome to our Q9 presentation for Together for medicines that matter. We have uploaded the presentation that is accompanying this call to our website, and you can follow this call throughout the next couple of quarters. When you go to Page 2 of this presentation. You can see that I'm here together with my team, our CFO, Enno; our COO, Craig; our CSO, Cord; and our CBO, Matthias. Enno and I will guide you through the initial report, and then we are all looking forward to your questions and are happy to answer that. As you know, this call follows our second Capital Markets Day of 2022, which we had last week in Redmond and which was focused more or less only on Just - Evotec Biologics. So we are very happy to today give you a broader picture about the whole business ongoing in the group. And we will also, at this point of time, of course, refer to Just - Evotec Biologics. But if you have more detailed questions to Just, let me please also advise you to go to the Internet where we have now uploaded the webcast of this presentation and where you can really follow this Capital Markets Day. Let me also thank you very much for attending this Capital Markets Day and your excellent questions around this. So let's go into our business, and let's go into Page number 4. And let's look at the latest highlights and also lowlights of the nine months report of 2022. We are focused on execution, acceleration and it's fantastic to see that we see undisrupted demand in all sectors of our business. This is best reflected by new and extended discovery and development agreements and also highlighted by some so far smaller milestones, but milestones are coming in. We see significant progress in neuroscience, especially in our collaboration with BMS. Why is this important? Because I think we all realize that CNS will be one of the most important areas to focus on in the next decades to come. Here, we hold together with BMS, a leading position in the field based on our [iPSC] platform technologies. When it comes to another highlight, yes, we highlight Just - Evotec Biologics despite the fact that we are in start-up mode. But our collaborations that we signed recently and our two contracts from the DOD that we have been committed by this fantastic institutions show us that we are truly representing a technological paradigm shift in Biologics. And with this, we look forward to not only filling our J.POD 1 investment, but also we are looking forward to filling our J.POD 2 in Toulouse, which we have started to build in the latest month. We have closed the acquisition of Central Glass Germany, which will in the future operators, Evotec Drug Substance and which we are very proud of because it is a logical cross-selling continuation of our value chain in the field of APIs. On our molecular patient databases, what we abbreviate with E.MPD, it is fantastic to see that we are making here great progress and that we are expanding our molecular patient databases for example, as we have done with their Hannover Medical School in autoimmune diseases. This is all based on our technological leading-edge software that we have launched commercially called PanHunter. This is Omics-driven data analysis and data integration, which is world-leading and where many scientists throughout all labs in the industry will have a lot of pleasure to use this tool in the future. Let's also not hide lowlight. Yes, we see delays in milestones, and we see a slower revenue recognition process, which comes from the scaling of especially our Biologics business. But this doesn't stop the Company at all. And yes, we see headwinds from rising energy costs and material costs and, of course, also from overall inflation. But I think on the second point, we are not alone with many other companies in the whole industry. If you go to Page number 5 of this presentation, let us again first highlight that we see undisrupted demand from all industry sectors. We want to especially highlight this because many people are talking about the slowdown of biotech funding and talk about biotech funding crisis, which is true, but in part, it's not true because Evotec is a high-quality organization is reflecting the answer for many of these companies where the switch from fixed cost to [indiscernible] cost is making them more efficient. And that's why for many companies that are currently suffering from this biotech funding crisis, Evotec could present the answer. With this, it's easy to explain by our revenues are going up by more than 19%. And we are -- even if we adjust for FX effect, our growth is very impressive. When you look at our adjusted EBITDA, it's, of course, a slow growing EBITDA this year and especially compared to last year where we had much better milestones and upfront in Q3. It's down by 36%, which, again, we have to and will try to correct in Q4. Just - Evotec Biologics is in a start-up phase, and therefore, we always want to highlight the dynamic of this business that, first, of course, we have to invest until we then see the revenues increasing and with this also profitability kicking in as we have always projected. Adjusted EBITDA is, of course, also here very strongly impacted by energy costs, material costs and also by M&A-related costs, as Enno will show you in the couple -- in a couple of slides. If we would adjust our EBITDA to take out Just - Evotec Biologics, you see the number is quite good and is really in order where it should be by growing about by 14%. If you look at our overall guidance, we are confirming our overall guidance where we see very good top line growth, and we still expect top line growth to be in the range of €715 million to €735 million. We will accelerate our R&D investment for sustainable growth into the long-term future of Evotec and has not stopped to invest in R&D or have not slowed down to invest in R&D. And when it comes to our EBITDA, I think it is clear that Q4 has to deliver significantly, and that's also what we will lay out through this call where we are confident that this will be possible. If you go to our financial performance, let me hand back to Enno to bring you a bit deeper into our numbers.
Enno Spillner: Yes. Pleasure to do so, and a warm welcome to everyone also from my side. Thank you, Werner. And starting on Page 7 with a summary of our group consolidated numbers. Revenues increased by a strong 19% to €511 million, and this despite significantly lower milestones upfront and license payments with more than 50% of revenues denominated to USD, we experienced significant tailwinds from the strong USD against the €in particular and revenue growth, excluding FX effects was at 13%. The gross margin amounted to 17.9% for the first nine months of 2022 and decreased from 23.1% in the previous year due to high ramp-up costs of the Just - Evotec Biologics business and a low contribution from milestone revenues, as already indicated before. Furthermore, inflation with significantly rising energy prices, more expensive material costs as well as increased logistic costs had a significant impact as well. The group R&D expenses remained nearly constant with €55.3 million versus last year of €53.5 million. And therefore, or thereof unpartnered R&D expenses of Evotec Innovate increased by 19%, various partnered R&D expenses decreased. The SG&A expenses amounted to €110 million and were thus €38.9 million or 55% higher compared to the last year. And expanding Evotec's number of employees to facilitate further growth, the U.S. listing from last year as well as fees for consulting services were the main cost drivers. The respective consulting costs were incurred mainly due to the preparation of our SAP implementation, which we started in 2022. New requirements in context of the U.S. listing, for instance, SOX implementation and M&A activities. The other operating income and expenses increased by €5 million and continue to be driven by a tax credits in particularly in France and Italy as well as Sanofi related R&D recharges. Please bear in mind, next year, we will only have the contribution from Sanofi for ID Lyon in the first half of the year as this collaboration will expire mid-2023. With a total of €44.6 million, our adjusted EBITDA has been influenced by investments to increase the growth and the value potential of Just -- J.POD as well as low contribution from milestones, upfront and licenses plus again experiencing strong inflation headwinds. For the first nine months of 2022, we reported a net income of minus €48.5 million, which was influenced or mainly influenced by share price adjustments in our EVOequity investment in Exscientia. Here, Exscientia's share price dropped from €19.76 per share at the end of 2021 to $8.21 per share at the end of Q3, which then resulted in a noncash loss from equity of €126.7 million. On Page 8, the next -- this slide depicts our continued strong revenue growth of 19% overall, which was well spread across most business areas. The base business stood at €502.7 million and continued to show very strong growth of 27%. Milestones, upfront and royalty payments of 8.1% were significantly below last year's number at the same time, which then stood at €36.5 million, including the €20 million milestone from BMS, which we received at that point in time. Just - Evotec Biologics contributed revenues of €27.9 million in the first nine months of 2022, compared to €34.7 million in the same period in 2021. Therefore, growth of the group's base revenue, excluding Just would have been or would have stood at 32%, which is quite significant. The gross margin, excluding milestones and excluding Just - Evotec Biologics stayed at 26.5% versus 21.7% in the previous year's period, once again confirming our very healthy base business going forward. That said, total gross margin only excluding Just - Evotec Biologics would be at 27.3% and thus in line with the last year's 27.2% despite lower contribution from milestones, as mentioned before, as well as increased energy cost and inflation also as mentioned before. The bridge on the net side or the EBITDA amounted to €44.6 million, as I mentioned, and decreased by 36% against previous year. That said, and while at nine months 2021, the Just start-up impact was not yet so significant. Year-to-date 2022, the adjusted EBITDA adjusted again for the Just J.POD start-up impact would total €84.6 million and consequently reflect again, growth of 14% or €10.6 million compared to the first nine months of 2021. Considering tailwinds from FX after nine months, this shows a positive contribution of €12.4 million is calculated on the basis of the previous year -- previous year exchange rates. Both our segments reported solid top line growth revenues versus the last -- or the first nine months of 2021 and the year-to-date [Execute] revenues, including intersegment revenues, grew by 23% to €526.7 million in the first three quarters. Revenues were driven by strong base business, which stepped up 18%, excluding Just - Evotec Biologics, in 23%. The adjusted EBITDA of the Execute segment was €75.8 million and was impacted by the ramp-up cost of Biologics. The previous year Execute reported an EBITDA of €87 million for exactly [value]. nine-month '22 Innovate revenues amounted to €122 million, which is significant 20% growth compared to last year due to continuous high demand for precision medicine reflected by expanding existing as well as several new partnerships. Higher base revenues of €29.6 million were, among others, driven by the increased FTEs in the [CMS] corporation, which we utilize there. However, and as a result of the continued R&D investment and the lack of milestone revenues, the adjusted EBITDA of Evotec Innovate remained as expected, negative. Looking at the single quarter, Q3, overall, my comments for the first nine months that I made on the previous pages, also apply accordingly for Q3. Base revenues further accelerated this quarter versus Q3 2021 across all business lines. So far, we didn't recognize any relevant impact from changing funding environment, as Werner described already before. However, milestones, upfront and license revenues contributed relatively little compared to a strong Q3 of the last year. This also explains the change in gross margin aside from inflation-driven cost factors that we indicated before. SG&A reflects the further dynamic growth, scaling, higher energy costs and strategic projects, in particular, M&A. As a result of the above, the adjusted EBITDA decreased to €11 million in Q3 coming from €33.9 million in the last year's Q3 and excluding Biologics, once again, the adjusted EBITDA would stay at the previous year's year level. Slide 12 summarizes Evotec's very solid and sustainable non-P&L related financial KPIs and the slight balance sheet expansion resulted mainly from the revaluation of the Exscientia on the negative side, being overcompensated by the USD 200 million payment or prepayment from BMS received in May 2022. The equity ratio decreased to a still very strong, 54.3%. The liquidity position decreased slightly to €823.7 million despite significant CapEx expenditures and equity investments and still reflects a very strong position. So the strong liquidity will allow us to continue planned CapEx investments to support growth projects such as the U.S. J.POD and the J.POD in Toulouse as well as the general expansion of our capacities technologies, platforms and, of course, our EVOequity portfolio. And with this, this completes my financial overview, and I therefore would like to hand back to Werner. Thank you very much.
Werner Lanthaler: Thank you, Enno. If you go forward to your Page 14 of this presentation, let me just summarize again for you what are our focus areas to accelerate growth in leadership for profitable long-term growth. We are building a PanOmics platform for better disease understanding and more precise medicines. We are leading the field of iPSC-based drug discovery and cell therapies, with Just - Evotec Biologics, we are highlighting the disruptive power of fully continuous manufacturing. And this is all based on an end-to-end shared R&D continuum where we can basically execute every experiment that the industry needs to progress on all modalities. If you go to Page number 15, you see how we are slowly with our PanOmics platform going broader and deeper into many of the disease areas and the partners where we are acting. So with this, the two new programs identified in our BMS collaboration in neurodegeneration are just a highlight of our access to more and even deeper insight in disease areas where we will expand this technology in the future. Expansion is also the key word for our molecular patient databases because here, building strong database is the basis for a portfolio of transactions that we are building in many disease areas and PanHunter is a tool to really integrate and analyze data is essential to understand and with this to better disease understand in every aspect of our activities. PanHunter is launched, and it will take a while, but you will see that the offering of Software as a Service will allow us to have even more partners closely linked to the technology powers that Evotec can offer. If you go to Page number 17 of your presentation, we just want to highlight that building an iPSC-based platform for drug discovery and for cell therapies is just at the beginning, but we feel very confident with our recent moves that especially in cell therapy. Evotec will enter the map of globally leading cell therapy iPSC-based players when it comes to off-the-shelf solution. If you go to Page 18, it's just again, calling out how proud we are of our Just - Evotec Biologics build out and build of J.POD that is at the starting point in Redmond and at the starting point Toulouse. And when we say starting point, we can today, as you see on Page number 19, report back to you that the initial basis for growth, which are basically endorsements of partners with their programs, has started and is picking up, not only in its number but also in its breadth when it comes to disease areas. And with three programs added in Q3 alone and another DOD award, we see that it took a while, but the pickup of Just - Evotec Biologics is taking place, as also highlighted on Page number 20, where we have already tripled our sales compared to '21. And yes, it's a disappointing Q3, which only €6 million revenues can recognize. But you will see that this is going up very nicely. And I think this was the lowest point of revenues that you will have ever seen on Just - Evotec Biologics in one quarter into the future forever. Let me highlight again our new partnership with the Department of Defense, where in a very fierce competition for technological leadership, Evotec has won the second award, and we will disclose by the end of the year, the size of this award, which is considerable. And with this, again, 2023 will be the starting year of significant growth also for Just - Evotec Biologics. If you go to Page 21 in our base business, it's great to see that we cannot only extend but also go deeper in various drug discovery and development partnerships and cross-selling into the development part of the value chain is what we are doing when it comes to integrated CMC. And here, for example, expanding these organics and other, especially orphan drug and smaller drug substances companies is making our way into a very, very important segment for more precise medicine. We also want to highlight the strong performance of our DMPK/ADME-tox testing business, which we -- to the outside often represent a Cyprotex because here we are owning and here, we are driving the leading brand when it comes to safety predictions and also when it comes to ADME-tox services. When you go to Page 22, let me highlight again that we have closed our recent acquisition in Halle in Germany, which is basically allowing us in the field of drug substance to service our partners much better in a fully integrated fashion from discovery into development into the market when it comes to drug substance. When you go to Page 23, you see that our Evotec Insight power reflected in building out a pipeline where we always own royalty rates and milestones without taking the risk of clinic development is growing forward. And yes, we have lost P2X3 this year but there are more than 140 projects that we co-own and that are all moving forward with the investments of our partners. As you can see, we also see some of the projects now entering approval state and these are small projects, but they show that the principle of building a royalty pool is fully intact and working. And for example, with a COVID-19 project, which will go forward in Korea, where we contributed a very important part of this product. We see that a product where Evotec did some important work and has access to royalties will be approved in certain parts of the globe in the future. And here, we expect important [indiscernible] to come also in the next couple of quarters. When we go forward, you will also see that the number of data points is very strong in '23, '24, '25, leading to this royalty pool that we always have envisaged out of our Evotec Innovate business. On Page 24, you should see that we still see a lot of good opportunities to invest in our operations in logistic companies or into platforms where we see a true leverage of what we are doing at Evotec. So that's also why we are very proud of some of the progresses that our companies that we go on are making. Having said that, we also see the volatility of some of our especially public holdings like mentioned before by Enno in Exscientia or Sernova. Going forward, with this, I want to highlight again that our co-owning strategy goes from academia to more mature companies and is just the starting point of building a very strong portfolio. Page 26 of this presentation highlights again and we talk about ESG and sustainability, we talk about ESG as a competitive tool and a competitive weapon for Evotec because we see that committing ourselves to environmental targets is an important contribution to the inside of the Company, but also to our value chain and our supply chain. We see that committing to social goals is helping us internally, but also is highlighting our contribution to the world, for example, in the field of -- into microbials. And we see by running a company with the best of all potential governance is helping us to guide the Company into a growth phase and having here processes under control because that's what government does for us. When we come to Page 27, let me again highlight our guidance of this year. Let me again highlight that we are on a good track to achieve our top line when it comes to €715 million to €735 million revenues. We are on a good track to invest into unpartnered R&D for long-term growth. And we are confirming our adjusted EBITDA, but we, at the same time, on Page 28 going to highlight that it will take a lot of effort and a strong finish for the year to achieve our EBITDA, and we want to be fully transparent with you, that we have to achieve significant milestones, upfront and licenses, which is highlighted here, where we have a lot of ongoing discussions for new transactions and where many milestones are in reach and will read out, especially in December. We see strong traction on our base business, which is really highlighting the operational leverage, which will come in also from the closed transaction in target import integration, which is now picking up speed and this also will contribute more EBITDA in the fourth quarter than it has done in the second and third quarter and we are very certain that we are close to a turning point of Just - Evotec Biologics, which will reduce the EBITDA impact that you see that. With this, we are very much looking forward to building out Evotec, as you see on Page 29, for long-term growth we see that our goal to achieve €1 billion in revenues is actually doable despite the fact that we see very challenging biotech overall funding environment, but we see that we are in a superior path here to many other companies. And we also see that once Just - Evotec Biologics will kick in and our milestone contributions will kick in that our adjusted EBITDA will be possible to bring to a level of about €300 million in 2025. Most importantly, building out our co-owned pipeline to a massive royalty pool is ongoing as we speak, and that's the reason why we are investing into unpartnered R&D also within our action plan 2025. With this, let me close this discussion and then open for your questions by basically highlighting that we expect a strong news flow to come on our R&D efficiency platforms, on our precision medicine platforms and within Just and this will continue not only for Q4 but also way into '23, '24 and '25. And with this, let me thank you and highlight on Page 31 our dates for '23, and let me thank you for following Evotec, and we are now looking forward to all your questions for this quarter and into the future. Thank you so much.
Operator: [Operator Instructions] First question is from the line of Zoe Karamanoli with RBC Capital Markets.
Craig Johnstone: Sure. Absolutely. Thanks, Werner. Thanks for the questions, Zoe. Your -- you are, of course, right that the revenues have been going down during the quarter, and it looks like a trajectory. But as you also have seen and heard the amount of sales that we've recognized during the course of 2022 has tremendously increased over 2021. And with quite a long contract duration, then inevitably, it takes some time before the sales land into recognizable revenues during the course of the ensuing 9 to 18 months there after the sales closed. So what we see, in fact, is a consequence of phasing of revenue recognition during the course of this year, where certain lines of work have been completed and the ramp-up of J.POD and manufacturing capacity in Redmond with the opening of the facility, which was only 12 months ago. So what we expect and anticipate is that, as Werner said, Q3 will be the lowest point in that curve and that we anticipate a very strong Q4 in revenues as a result of the sales from earlier in this year. Obviously, with sales increasing three-fold over last year, even with our revenue recognition path over multiple months and years, we absolutely expect that revenues in Q4 will go up significantly over Q3 to the tune of perhaps three-fold. Is that addresses the question?
Operator: Next question is from the line of Christian Ehmann with Warburg Research.
Operator: Next question is from the line of James Quigley with Morgan Stanley.
Matthias Evers: Thank you very much, Werner. And [indiscernible], James, to your question, I mean, one way to think about this is also that we deal with a number of customer segments has also introduced at the Capital Markets Day. So we have seen demand from the biotech segment, and we have been speaking about the first in human, the early clinical trials. And those evolve, of course, from early clinical supply, later clinical supply eventually also commercial supply. That is a right as introduced with selective demands over the years, of course, also attrition adjusted because some of these projects will fail. And that gives us a relatively smooth curve. And for that story, we, of course, increase also the number of customers. But what is also important to highlight, as we speak about later-stage projects, even next-generation projects what we are working on that have larger commercial volumes immediately. So that could be in a positive sense lumpier. Those have -- it's harder work to bring these projects on the pipeline, but it's important to understand that, that customer segment exists. And thirdly, we introduced at with CMD that we have an undisclosed partnership discussion with biosimilars which are closer to the second bucket, meaning those are efforts with larger volumes and more clinical supply runs and development runs. And with that, I mean, we say at this moment of time, we have the trough now, but you can expect a smoother picture as crackers introduced. And with that, back to Werner.
Operator: Next question is from the line of Derik de Bruin with Bank of America.
Operator: Next question is from the line of Peter Welford with Jefferies.
Operator: Next question is from the line of Steven Mah with Cowen.
Operator: We will move on yes -- we will move on with Joe Hedden with Rx Securities.
Cord Dohrmann: Yes. So happy to answer this question. So first of all, PanHunter is a tool that really allows the comprehensive and combined analysis of Omics data and bringing into context with particular clinical data sets, but also preclinical pharmacology data sets. And so we believe that this is a tool as the megatrend of the for precision medicine approaches and more personalized medicine approaches in the industry continues to move forward, that this is a tool that the more Omics data is being used, the more these kind of tools will be required in the industry. And we feel that PanHunter is probably one of the most comprehensive tools that allows the analysis of these kind of huge data sets and with that, we believe that our customer will be not just in the pharma environment, where a lot of fund companies have their internal capabilities, but this is a tool to the [market], essentially the analysis, make it feasible for simple bench scientists to play and crunch the data with the data sets independent of a direct support of a [indiscernible] or a data scientist and -- so it's pharma we are targeting, but also in particular, biotech companies that may not have bioinformatics department set up to the extent that they can deal with these huge amounts of Omics data that is increasingly coming online through public domain sources, but also in-house generation of these kinds of data sets. The exact pricing model, et cetera, that depends on the extent of the use of the tool as well as the number of people expected to use it. Here, we have not disclosed any cost structures as of yet. But we are already working with a number of companies or collaborators already on the biotech sector, but also pharma sector that are accessing these tools and are basically accessing this tool and on prescription model essentially. So that's where we currently are with that. It's a tool that is -- will be built out in the future even further beyond where it is today, but it is a very excellent starting point. And once again, from as far as we are concerned on what we know about the field and they are scanning this very carefully, the most comprehensive tool available.
Operator: Next question is from the line of Steven Mah with Cowen.
Operator: Your next question is from the line of Falko Friedrichs of Deutsche Bank.
Operator: Final question is from the line of Victoria English with Evernow Publishing Limited.
Werner Lanthaler: Thank you so much for understanding where we are with the Company and guiding us into the next years together with your analysis and your view of the Company. With this, I wish you a great day, and hope to see you also. All the best.
