Evotec SE (NASDAQ:EVO) Q3 2023 Earnings Call Transcript

Evotec SE (NASDAQ:EVO) Q3 2023 Earnings Call Transcript November 11, 2023

Werner Lanthaler: Welcome to our -- good morning. Good afternoon. Welcome to our Q3 Call. Resilient into the Future of Biopharma R&D. That’s how we titled this presentation, which we have uploaded to the Internet and you are welcome to join this call also with the presentation. Resilience is all about being able to overcome the unexpected. Our goal of resilience is to follow science and technology and thrive together with our partners. So you will see throughout this presentation, that resilience is not what happens to you. Resilience for us is, how react -- how you react to something, how you will respond to something and how you recover from what happens to you. I am here together with my team, which you see on slide number three of this presentation with Laetitia, with Matthias, with Craig and with Cord, and I want to thank them very much for driving resilience into our company stronger than ever before.

If you go to page number five of your presentation, you see the highlights and I want to stress basically only highlights on our Q3. And if we reflect a little bit on this year, you see that we are growing strong again with the cyberattack in the rear mirror now. And when I say we grow strong again, reporting double digit growth of 14% on topline and 13% on bottomline, despite the cyberattack is a great result. More importantly, we are driving this company into the long-term future and here just a few events that highlight that. For example, a major collaboration in neurodegeneration together with BMS was started in 2023. For example, the continued validation of our Just-Evotec Biologics business, where we have an excellent pipeline building moment that we witnessed altogether here.

A biotechnology lab filled with test tubes and equipment, representing the life-saving therapies of the company.

The tech alliance with Sandoz, also an agreement with the Department of Defense, highlight this and make our second J.POD that we are building in Toulouse, an absolutely vital investment into the future. We are building pipelines together with our partners. That’s the measurement that you should take in looking at value increase of Evotec into the future. So strong progress in our pipeline building efforts is highlighting value creation into the future. Here, we will then talk a bit in the later part of this presentation about multiple events that are happening, that are driving this value forward. What you should also appreciate is that we are following science and not only by, for example, translating science with Novo Nordisk or out of Singapore via our BRIDGEs we can highlight this commitment.

And of course, we are more than ever, and fully committed to our ESG topics, which are highlighted here on our SBTi targets. Yes, there is a lot happening in the company, and of course, we are also aware that this is happening in light of not so easy biotech times out there, because after COVID times, there was, of course, a bit of a market volatility where we think that our business model shows that we are clearly differentiated with our technology stack to many other companies who can only react to that crisis, we are creating opportunities out of this crisis. So, I want to stress again that we really see our business model of Evotec more as the answer to the biotech funding crisis than as part of the problem. So, yes, we are going strong again and if you go to page number six, this also is important because in times of short-term volatility, long-term goals and plans are more important than ever.

We think that our differentiated platforms, especially PanOmics, will show that the future of Action Plan 2025 is just around the corner and that many, many goals that are written in this Action Plan 2025 are already achieved and those who are not achieved yet will be achieved in 2025. Of course, you have to factor in here that Just-Evotec Biologics will come fully online by the end of 2024 and into 2025, as many of the capacities are just in the process of being built. Our business dynamics are looking good. They are also looking good when we make a first view into 2024, where I think, again, double-digit growth will be absolutely possible for us in 2024 and that shows you, again, the differentiation of our business model versus many other players on the market.

With this, let’s look a little bit deeper into our Q3 results, and with this, I want to hand over to Laetitia.

Laetitia Rouxel: Thank you, Werner, and a warm welcome to all of you for joining us today to delve into our financials for the past nine months. Slide eight, as depicted in this slide, we had very strong start to the year with revenues in Q1 2023 at €213.6 million, which is an implied growth of 30% versus Q1 2022. A robust underlying base business, as well as new strategic collaboration with Janssen and the expanded collaborations with BMS, have contributed to this excellent performance. In both Q2 and Q3, we confronted the repercussions of the cyber incident, which necessitated a brief shutdown in Q2 to safeguard our partners and stakeholders. This event resulted in missed opportunities of approximately €70 million. Throughout these challenging quarters, our drug discovery and development business were impacted.

Despite these hurdles, we have persevered by expanding our operation and cultivating critical partnerships like the tech partnership between Just-Evotec Biologics and Sandoz. Our resilience was evident in our financial performance with Q3 group revenue approaching €200 million and nine months group revenue reaching €580.1 million, reflecting here again an increase of 14% compared to prior year. Moving to the next slide, I will provide here a summary of our selected balance sheet and cash flow details. Between December -- 31st of December, 2022, and 30th of September, 2023, total assets decreased slightly by minus €2.7 million to €2,254.5 million. There is a shift in the asset composition, reflecting the allocation of cash equivalents towards CapEx investments.

Our stockholders equity as of September 30, 2023, decreased by €46.4 million to €1,140.8 million compared to the end of 2022. This change is attributable mainly to the net loss, resulting in an equity ratio of 50.6%, slightly decreased from the 52.6% reported end of last year. We still maintain a strong equity position, ensuring a solid foundation for future investments and maintaining financial flexibility. Operating cash flow in the first nine months was €15.2 million compared with €236.6 million in the first nine months of last year. The comparable figure last year was driven by a €200 million upfront payment from BMS. The lower figure this year is impacted by the cyber incident, but it is partially offset by received payments related to our BMS collaboration in euro and protein degradation.

Cash and cash equivalents amounted to €499.4 million as of September 2023. The increase is a result of higher share of our short investments within our group liquidity. Our total liquidity decreased to €613.4 million as longer-term investment matured and have been used to finance capital expenditures. Capital expenditures amounted to €150 million and were at a similar level than nine months last year with €157.2 million. The spent in both years was to a large extent driven by building our capabilities and capacities for Just-Evotec Biologics, both in the U.S. and in Europe. Our cash investments in affiliates and associated companies were significantly reduced to €15.8 million, compared to €70.7 million last year. Moving to the next slide, group revenues for the first nine months of 2023 demonstrates a robust 14% increase, reaching €580.1 million, fueled by a diverse business portfolio in a challenging environment.

Key growth drivers included our BMS/Celgene programs and the successful delivery of work packages as part of our new technology partnership with Sandoz. Base business kept growing, increasing by 14% from €502.7 million in nine months last year to €575.3 million in the first nine months this year. Evotec received milestones, upfront and licenses payments of €4.8 million. Just-Evotec Biologics contributed €74.1 million during the nine months of this year versus €27.9 million in the comparable prior year period. Here we have nearly tripled its revenues within 12 months. Switching now our focus to cost management, the cost of revenue for the first nine months of 2023 amounted to €442.7 million, yielding a gross margin of 23.7%. The increase of margin was supported from signing the corporations and partnerships with BMS and Sandoz.

Excluding FX related to the capacity built at Just-Evotec Biologics, total gross margin would be 26.7% versus 27.3% during the same period last year. Unpartnered R&D expenses were €45.7 million, 10% lower than the comparable prior year period. This decrease was influenced by a temporary reduction in R&D cost stemming from the cyber incident. Our adjusted group EBITDA, which does not include external one of cyber-related costs for the nine months ended September 2023 amounted to €50.2 million, which is the result of missed opportunities after the cyberattack, as well as higher cost managed adverse effects of the incident. Internal cost of recovery in Q3 2023 were mitigated due to improved cost structures. Therefore, adjusted EBITDA in Q3 2023 to €16.3 million versus €11 million in Q3 2022.

The nine months 2023 adjusted EBITDA excluding Just-Evotec Biologics, would have reached €55.9 million. Moving to slide 11, our guidance remain unchanged as previously outlined in our business update in July, with revenue expected in the range of €750 million to €790 million. Unpartnered R&D expenses estimated at €60 million to €70 million and an adjusted EBITDA targeted of €60 million to €80 million for the full year. Regardless of the treatment of the one-off external cyber cost, we expect EBITDA guidance to be met. Moving to slide 12, I would like to share our latest update on our key activities focusing on cost efficiency and optimization. First, in the pursuit of leaner process across all our sites, we are making great progress.

We have focused on optimizing our headcount and various cost containment measures, leading to significant savings in 2023. Early October, Evotec has engaged into the social process of redeploying its chemistry activity out of Marcy Lyon, and in parallel, we are gearing up for a focused ERP buildout in the U.K. and at J.POD Toulouse in Europe. From a cash optimization, investment in CapEx have been reprioritized, and we expect €50 million reduction by year end 2023, as well as reduced equity investments. The good news is that our diligent effort have not gone unnoticed. We can confirm expected full year savings of €25 million, which is a testament to the effectiveness of our initiative in both cost optimization and efficiency. We will continue to pursue our 2025 strategy for sustainable growth and cost management, remaining dedicated to our shareholders, and our overarching mission for medicine that matter.

To conclude, we are shaping a more efficient and resilient future, where research never stops. Thank you for your trust and support as we continue this remarkable journey. That said, I will now pass the floor back to you, Werner.

Werner Lanthaler: Thank you, Laetitia. If you go to page number 14 of this presentation, we want to highlight the paradigm shifting platforms are our key growth drivers. We are very proud of our end-to-end shared R&D service platforms. This is the foundation of stability into our long-term growth. This is the foundation of our quality services that we are delivering. But I already mentioned that our differentiated technology platforms are key drivers for our long-term and future success. This comes on top of our end-to-end shared R&D platforms, and if you look at this graph, you see the big drives that comes from PanOmics and from Just-Evotec Biologics, just to mention two platforms here. And this is why we often say we are just at the beginning of paradigm shifting platforms that will shape this industry.

And if you go to page number 15, we are shaping this industry by pipeline building with PanOmics and other technologies throughout the industry. And please don’t forget, it is our long-term goal to build the largest royalty pool in the industry, through our partnered R&D model. The numbers that you see on that slide speak for themselves. The €15 billion in milestones are already contracted. The 8% to 10% royalties are already contracted. The milestones will come and will provide an important driver for profitability and profitable growth into the future. That’s why we are so proud of our partners, and the partnered pipeline that we are building here. This is enormously efficiently leveraging our R&D platforms into pipeline building efforts.

And on page number 16, you see that when we are describing our pipeline building efforts, we often use this image of an iceberg, because you only see the top at this stage. And on the top, you see 18 projects in the clinic or close to the clinic at this stage, but what you should see that there are more than 120 projects that are filling that pipeline into the years to come. So it’s almost irresistible to see more news flow out of this iceberg into the future. And if you go to page 17, here are just a few highlights of co-owned or partnered projects where news flow is going to come and where the beauty of our business model is that the data point is typically always generated on the costs taken by our partners, and that’s why for us, this is always a free option to the upside and no downside that comes with the generation of these partnered projects.

If you go to page number 18 of this presentation, let me jump again to another paradigm shifting platform, which I already mentioned once today, Just-Evotec Biologics. Why do we say paradigm shifting? Because continuous manufacturing will shape a high cost industry into an affordable industry. Fully continuous manufacturing will create access to so many more people for biologics, that this is something where the term paradigm-shifting is clearly well deserved. And if you look at the two pictures here, maybe it could be a bit better visible, but what is visible here is that on the lower picture there’s nothing. And on the picture on the higher part of this page, there is a J.POD Number 2 existing and this is not any AI. This is reality in a picture here where only in 12 months, it is amazing what our people at Evotec do, and let me thank the whole organization for creating such a massive movement not only in J.PODs but everywhere on our platform.

If you go to page number 19, making this effort wouldn’t make sense if markets wouldn’t support us and we couldn’t be more excited about the validation that we see for Just-Evotec Biologics, even here in not the easiest times of the overall biotech market, but we are finding that our capacity for discovery and development is already very, very well filled and we are ramping up additional capacity on the basis of future demand and there are multiple discussions ongoing into 2024 and 2025 already. So, obviously, 2025 -- 2024 is excellently filled for Just-Evotec Biologics already and 2025 will be filled through our business development pipeline, which is being built here. Mentioning the number of €850 million contracted sales just gives you comfort here that we have 8 times higher contracted sales than only one year ago.

If you go forward in this presentation and if we jump back to our governance, and to our impact that we want to have as a company, let me highlight that it was important -- that it is very important and you see it on page number 21, that near-term Science Based Targets are validated and approved now. Why is this important because we always said we want to keep our ESG promises and have aligned our commitment here with our partners to follow the Paris goals. Like most larger companies, we have now validated Science Based Targets by SBTi. And you will see that this is published on our website as of tomorrow and it is an important signal that as a company, we want to make a contribution not only to patients, but also to the planet. And if you go to page 22, we want to thank the analysts who are recognizing what we are doing here, because a company that gets upgrades by doing more for the planet, I think, is also good for every portfolio of an investor to be held.

And having here EcoVadis, for example, stepping up in their rating for us is a good latest signal that we can report. Page 23 is again highlighting the three dimensions on ESG where we are keeping our promise, the environment, our social impact and our governance. On our social impact, we want to make also internally the best of the company every day. So that’s why voicing what can be improved is important and that’s why, as of tomorrow, 5,000 people will be part of an Evo voice, what we call pulse test and engagement survey to see how we can even better as a company internally, but also towards our partners. If you go to page number 24, let me come to governance, because having the best people around us is key for our long-term success and that’s why we are so proud of our existing Supervisory Board, but we are also so proud that we are permanently able to upgrade our Supervisory Board with people who have shown that they are shaping the industry with their intellect, with their personality and also with their business acumen.

We are very proud that Rupert Vessey is suggested to be nominated for membership on our Supervisory Board and will stand for vote in our next Annual General Meeting in June 2024. So, it’s fantastic that Rupert will join this company and you will see that this is also great for not only Evotec, but also our partnered network. Going to page 25, you should see that despite the fact that we had several hiccups this year, we are resilient and resilience is what you make out of it and that’s why achieving our goals is the plan and we are executing on our targets and we are going forward towards Action Plan 2025 and beyond as we speak. And with this, let me thank you, because 26 shows you and is the invitation to you, not only to come to our next week’s Capital Markets Day, but also to follow us in the long run into 2024, 2025 and beyond.

And page 27 rounds up this presentation, again, by highlighting that our Capital Markets Day next week will show you how paradigm shifting technologies like PanOmics and like iPSC-driven drug discovery changes the world and where you can witness how Evotec is a big part of that. Thank you so much. We are looking forward to your questions.

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