Ladies and gentlemen, welcome to the Evotec SE Half Year Report 2024 Conference Call. I am Udith, the Chorus Call Operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Volker Braun. Please go ahead, sir.

Thank you, Udith, and good day, good morning to all of you attending our H1 2024 results call today. I trust that you all have seen our press release this morning and that you have had a chance to take a look into the report already which we will discuss in more detail in the coming hours. Before we go there, it's my obligation to make you aware of the cautionary language as outlined on Page 2. But now I would like to hand over to Christian Wojczewski, our CEO, to guide you through the deck and that we have prepared for today's call. And please, Christian, the floor is yours.

Thank you, Volker, and welcome to everyone on the call. Before I share the agenda with you, I would like to introduce you to the participants in today's call. So here with me in the room, we've got Laetitia Rouxel, our CFO; we've got Craig Johnstone, COO; Cord Dohrmann, CSO; Matthias Evers, CBO on the call as well Aurelie Dalbiez, CPO. Special thanks also to my colleagues from the Management Board. They did a tremendous job onboarding me during my first month at Evotec. Laetitia and I will guide you through the slides. And as Udith mentioned, at the end of our presentation, we will have a dedicated Q&A session. So the entire team here is available to answer your questions. We will cover three topics in this call, the business revenue, including the first half year results, followed by an operational update. Finally, a follow-up on our priority reset, which was announced earlier this year and which will include further comments on the renewed outlook. Let me start the business update with a few words about what I found at Evotec just after a few weeks in the business. Our company over the past years has evolved into a true R&D power house. Three elements in particularly make Evotec unique. Firstly, our people, the dedication of our world-class talent base is simply impressive. With almost 5,000 highly experienced employees, we have a strong scientific, innovative and creative capacity. Secondly, the quality of our leading-edge technologies and platforms. They allow us to bring R&D to the next performance level and we go beyond the obvious. Thirdly, the deep partnerships with top pharma and biotech. Evotec has year-over-year demonstrated outstanding quality of services to our partners, resulting in high levels of repeat business, long-term and integrated deals and a spotless reputation…

Thank you, Christian, and welcome from my side. Let me now guide you through our H1 financial results in more detail. In H1 '24, we achieved EUR390.8 million revenue, which represents a slight 2% increase compared to the same period in 2023. The revenue increase is driven by the continued growth of Just - Evotec Biologics offsetting the lower revenue in shared R&D. Just - Evotec Biologics reached half year revenue of EUR88.5 million compared to EUR59 million in the previous year. This growth of 50% was strongly driven by the higher order book in the US and helped by the first client projects in Toulouse. The new manufacturing plant in Toulouse, France is expected to be fully operational in Q1 2025. Our shared R&D business declined by 7% from EUR324.8 million in H1 '23 to EUR302.4 million in 2024 due really to the persisting challenges in the market environment. We remain committed to investing in the future with the R&D expenses of EUR29.3 million in H1. However, we reduce spending from EUR30.9 million in H1 last year to EUR29.3 million H1 this year, representing a 5% decrease as we focus on platforms that are best aligned with the strategic fit and relevance for our partners. Adjusted group EBITDA for H1 '24 is close to breakeven at minus EUR0.5 million, driven by a persisting mismatch of revenues and costs in the shared R&D segment as well as higher costs related to the ramp-up of the new J.POD in Toulouse, France within the Just - Evotec Biologics segments. To sum up, we faced a challenging H1, driven by our high fixed cost base in combination with the slow market demand for our shared R&D segment, which we are addressing through our priority reset over the next quarters. An additional contribution to…

Thank you, Laetitia. I will start with recent developments in shared R&D and then speak about Just - Evotec Biologics. As started earlier, our Discovery business outside the BMS partnerships had an exceptional quarter in the second quarter this year when it comes to close sales. As a reminder, Discovery is where our core offerings in shared R&D sit and it reflects roughly 70% to 80% of shared R&D. This is a great achievement and speaks to the differentiated value proposition Evotec has in an overall weaker market environment. As explained, we see an increasing share of multiyear deals and slower ramp-up from project launch to broad use of Evotec capabilities and consequently the utilization of our workforce. Hence, sales translate into revenues over the remainder of 2024, but also into 2025 and beyond. In short, our mix is changing further towards strategic integrated deals, actually spreading out sales over a longer period of time in terms of revenues. Hence, we see both a positive momentum while continuing to face the challenge of competition and slowdown of growth in the more fast turning and transactional parts of our business. Notably, let us call out development. While our integrated offerings are differentiating, especially our highly sought after INDiGO solution, we see a challenge to deliver short-term revenues. We started the turnaround program and see increasing proposal momentum, but it is too early to declare success and it will largely need tailwinds for market recovery in 2025 to move back to revenue growth in development for this part of the business. Evotec continues to be a highly attractive partner for pharma and biotech companies as well as foundations such as CHDI and Crohn's & Colitis Foundation. This is based on our fully integrated capabilities, but in particularly also on different drug discovery…

Ladies and gentlemen please hold the line. The conference will resume shortly. Thank you. [Technical Difficulty]

US and Europe, including our new site in Toulouse, coupled with our focus on commercial excellence. This positioning has resulted in a substantial growth and our sales order book now significantly exceeding EUR1 billion, including commercial supply commitments. Based on our growing order book, our quarterly and last 12-month revenues are steadily increasing. The quarterly fluctuations are mainly due to batch production volumes. We're on track to close this year with record revenue. It's important to note that while we are experiencing substantial growth, the majority of our revenue still comes from process development, though clinical is becoming increasingly significant and we have a clear pathway into commercial manufacturing. Let me now summarize the development of our two business segments, as outlined before. For shared R&D, Q2 is overshadowed by the mismatch of revenues and capacities. This is particularly true for our more transactional and fast-turning offering. Strategically, we've progressed on focusing shared R&D and started identifying non-core activities. Gene therapy in Orth being a notable example. At the same time, we were able to close further multiyear strategic collaborations. This speaks to the ability of Evotec to provide highly differentiated offerings in a difficult marketplace. The Just - Evotec Biologics portfolio is expanding and we have signed a very important extension of our partnership with Sandoz, building on momentum and initial successes. It continues to add biosimilars to the pipeline and even more importantly, drive commitment of Sandoz to leveraging J.POD technology for the commercial manufacturing way into 2030s. Overall, we are making progress on resetting the business, but combining the effect of delayed market recovery in 2024, our capacity adjustments being fully implemented only in early 2025 and learnings as we ramp up Just - Evotec Biologics, it all led us to revise guidance for 2024. Let me…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Jack Reynolds, RBC. Please go ahead.

Hi. Thanks for taking the questions. Covering for Charles Weston today. I have two please. First was on shared R&D. So was this weakness because existing customers and contracts have kind of delayed the work that's kind of currently ongoing or are there kind of fewer new projects starting. And I guess just kind of thinking about the wins kind of with the recent wins, how does this translate into revenue over the next 12 to 18 months? And the second question was just on the cost savings. You mentioned that you start to see benefit in H2 and then see a benefit of EUR40 million in 2025. Does that mean the benefits kind of ramps through H2 and are fully realized by 2025 or do they continue to ramp through 2025, implying there could be additional benefit in 2026 and beyond? Thank you.

Thank you, Charles. And I hand over the first question to Matthias and I think the second one to Laetitia and this is a very easy to answer.

Thanks for the question. And this is Matthias here. Good afternoon, everybody. That is really a question at the heart of what we try to present today because we see positive feedback on the value proposition from our customers, which are often integrated longer-term projects. Time period, just to give you an illustration, could be easily three years, two to three years for longer-term periods. These projects, when we have talked about the delay are converting from sales to revenue, but we have seen more recently a little bit of trend that it takes a bit of time from project start to actually more broadly leveraging the Evotec capacity and capability. To bring that a little bit to life, you might start with some target validation work, some biology work before we then ramp up more fully medicine design, chemistry work, et cetera. So that's really this peer that sales translate into revenues over a longer period of time, as Christian has presented before. So now you had a sub element in there are less projects starting. I think on balance, I have to say, yes, just by the number of projects because we have been clearly saying that we are lacking volume on the more fast turning, very transactional work that are, by nature, also smaller in value. So this is, of course, in a higher number of projects. And that's something which correlates well with market momentum. And as we have presented again, I mean, we see not the signal for market recovery. So that's part of the question I have to answer, yes, the number of this transactional work projects there is lower. And then your last bit of the question, a recent win, how do they translate? You have seen the exhibit that we had our best quarter in Discovery. Now that you could roughly say that 70% of that sales volume are multiyear, longer-term projects. And those are very small, as I just tried to explain, so they really translate into revenues well into next year and even beyond 2025. Hopefully, that gives you a little bit calibration and then I hand over to Laetitia.

Thank you, Matthias. To answer to your question regarding the cost savings we aim for with our project reset. Here, we can confirm that as of July this year, we will start having in the P&L FX and savings already in 2024, meaning, that we aim to close and get that fully on a full year basis in our result of 2025, representing EUR40 million. So this year, around EUR10 million, we will already have activated and it will be realized savings, full year impact next year and onwards. So it's recurrent savings. So it's EUR25 million, and we can count on it for the year after.

Great. Thank you.

All right. Thanks, Charles. And back to Udith.

The next question is from Ben Jackson of Jefferies. Please go ahead.

Hi. Thanks for the question. It's Ben Jackson, Jefferies. Firstly, just with the 2024 guide, are you able to give us a little bit of color about the relative contribution from each of the business segments? Is that something that you have clarity on and can provide towards? And then secondly, just more high level, are you able to offer a little bit of insight in what you're seeing from the large pharma spending front? Has there been any particular softness in that perhaps the preference for later-stage trials and any kind of industry-level trends that you're thinking that are worth highlighting? And then also off the back of that, if you're seeing a particular shift in what the large cap pharma and perhaps the mid-biotech as well are pursuing perhaps as a result from pressures of IRA? Thank you.

Thanks, Ben. And again, on the market side, Matthias will respond. Then on the financials, Laetitia will take the question.

Okay. So on the financials, I start regarding the guidance and the main drivers. So as said previously in the presentation, we have three main buckets there with shared R&D. We have, obviously, the delayed market recovery. And as we said, the slower sales to revenue conversion, which shifts our growing order book into 2025 and reducing our full year EBITDA expectations by EUR50 million to EUR55 million versus the previous guidance. For Just - Evotec Biologics, we are learning as ramp-up operations. Additionally, we are front-loading costs to meet significantly expanded sales orders in future years and leading to higher COGS in 2024. It represents about EUR50 million expected negative EBITDA impact versus the previous guidance. And we also highlight the unprofitable business in Halle and Orth that we have identified as a noncore asset, which has contributed by EUR5 million EBITDA downside. So I would say the combination of the three elements brings the revised guidance to as confirmed and communicated last week. And I would say, yes, at this point, our capacity is highly sensitive to the level of revenues. When I come I explained the shared R&D is directly driven by the top line. We know that it's highly sensitive to the level of revenues we have due to our fixed cost base business. And this is the result of capacity expansion in previous years that we have been starting to address as per our presentation already done earlier. So we have now to really shared R&D top line driven directly largely contributing to the drop in EBITDA costs and ramp-up and learning on Just - Evotec Biologics and I would say the true noncore business that has generated roundabout EUR5 million versus previous guidance drop. Moving then Matthias to you.

Yes. Let me cover a little bit your question on the market and big pharma. So in our last presentation in May, I explained a little more in detail how we see the market from a CRO, CMO perspective at the buyer's market. I think we are still in it. And I think in one key message from us today is, we don't see the market for recovery just to happen this year. So that's what we anticipated earlier. Now with that macro statement, let's dive a little bit into pharma, I mean, to your point, I mean pharma US is, of course, a core market and pressure on pharma, that's the one part of an issue that we see, I mean, wherever the election goes. So there's, of course, economic pressure on pharma. How does it translate into R&D? So it's very evident from big pharma, from discussions with our customers from you see it on the biotech on the receiving end. There's a clear prioritization of R&D spend in the clinical phase, focus on clinical assets, also narrowing and focusing on key indication and therapeutic areas which puts research spending under pressure, which is, of course, part of our business. BIOSECURE is somewhat, I say that's carefully compensating for us. So we see some interest from big pharma to look into more transactional activities, but it's too early. I think the time line will carry well into next year because it's, I would say, exploration mode because the big pharmas have multiyear projects with Asian partners. And you asked also on the IRA, I think, it's one factor contributing to economic pressure because most pharmas from our experience, do see the relevance of small molecules, given it's in from a scientific side an important modality, but of course, there's additional pressure. Hopefully, that gives you a little bit color. And back to Udith.

All right. Thank you, Ben. And Udith, any further questions, please?

The next question is from Michael Ryskin of Bank of America. Please go ahead.

Hey, thanks for taking the question. I want to follow-up on just sort of a broad question on the market challenges you're seeing. You just talked through a lot of what's going on with Biotech with NaturePharma. I think it's safe to acknowledge that visibility remains limited for everybody in the industry in terms of these market challenges and how long they'll last. Now you talked about some of those persisting into 2025. What if it persists longer, right? We're talking about Biotech funding. We're talking about IRA. Some of these could drag significantly further. So how do you feel about the setup there? And I guess tied to that, talking about the long-term algorithm, the long-term growth construct? Any comments you made there in light of the recent changes? Thanks.

Thank you, Michael, and probably a bit early to comment on the market for 2025. But Matthias, please.

Okay. This is, of course, a very important question, and we don't want to sound like, oh, let's hope for the future. I think what we are saying today is, I think by now, we understand the market well in the here now where the pressures are. So that, I think, one step of the base where we are today. The second step is, which is important to realize we are able to sign strategic deals in the current market environment, which means we have positive feedback or there is an unmet need for our value proposition. And that's why it's too early to talk about future strategy, future plan. I mean that's an anchor point for future growth and future profitability. Now in consequence at least meet for the more, what we call, fast turning transactional work, there is one scenario, which is what we anticipate market recovery in 2025. If not and there's a delayed persistence of the weaknesses. Of course, I think, and there I go back to Christian, he has talked about portfolio capacity adjustments, et cetera, that then have to, I mean, we have to take into account such measures like our competitors are doing.

Okay. And tied to that, you've identified some costs in terms of both facility, but also some capabilities, the gene therapy business, the large scale API manufacturing. Are there any is that ongoing? Is there a possibility for further cost reduction and further refocus of some of the capabilities of the organization or would you say that component of the plan is done. You've identified everything there is to cut.

Yes. Thank you, Michael. And what I was trying to allude to is, obviously, we're in a phase right now where we're doing a strategic review and we are also in a transformation. And I would not suggest that our journey is completed. Think about it in components and I was trying to lay that out a little bit on the last slide. The reset that we started earlier this year has led to a sizable impact for the initiatives that we have taken. But then also when you consider that we've been growing the last 10 years at a very high pace, obviously, there is room to optimize. We will do a strategic review, as I said, but we also definitely will look into productivity levers. Part of what we've done right now is also to adjust the capacity to the new market environment. I think there's clearly room to upgrade the Evotec model when it comes to processes, systems and so forth. And that is part of our transformation program. So the clear answer is yes.

Okay. Thank you.

The next question is from Steven Mah, TD Cowen. Please go ahead.

Great. Thanks for the questions. I have three questions on Just - Evotec Biologics. So first, the acceleration of the capacity ramp-up in Toulouse, can you provide more details on how much you're going to be building out Toulouse? Are you going to be maximizing the Toulouse capacity or just building out to the existing sales book? And then second, is there any plans to build out capacity at the Redmond site? And then third, can you give us a sense for how much reserve capacity you're committing to Sandoz on a percentage basis of your expected capacity in the future? I ask because due to BIOSECURE there maybe a shortage of precision biologic manufacturing as US companies transition away. I'm just trying to get a sense for how you're thinking about the cost of investment today in Just - Evotec Biologics versus profitability impact versus potential future opportunities? Thank you.

Thank you, Steven. And again, Matthias, on Just, please.

Steve, good to hear you. Thanks for the questions. I think what we communicated the accelerated ramp-up, I mean, the profitability impact on Just - Evotec Biologics, while sticking to our commitment of breakeven, we make some learnings as we go. I think that's the fact, I mean, we learned because as you -- I think very well know, Steve, it's a new technology capability that we ramp up. But no, I mean, we are not in one step maximizing Toulouse. We are basically accelerating the existing plan of capacity for Toulouse. We are not planning to expand Redmond yet, and we are also not talking about the next J.POD. So it's basically the capacity we have talked about putting that quickly in place that we are ready to roll in the next year. So and that's why also the opening of J.POD Toulouse is on track. Your second question is very important, but I cannot give you percentages or exact numbers on Sandoz. We have a significant commitment. And what I can say is that Toulouse will play a significant role. I would also say we remain open for other partners just to be clear. I know this is not a BD call, but we remain open, but it's a significant part. Your precision medicine, I mean, that's also what keeps us awake at night, and we fear with Redmond and also the Phase I supply out of the other, I think, we have an attractive offering exactly for that opportunity. So I think that's what we are also banking on for the future.

Maybe just to add that, obviously, we have different components here and the commercial manufacturing comes later. And absorbs more capacity, but in earlier stages, there's more development work. So naturally the mix here is changing over time.

Steve, hope that's okay. Otherwise, we can take offline.

Yes. Thank you.

Sure.

Udith, I hear we have, I think, three more to go.

Yes. The next question is from Falko Friedrichs of Deutsche Bank. Please go ahead.

Good afternoon, Falko.

Good afternoon. Thank you for taking my questions. Christian, the first two questions are for you. Obviously, a strategic review is something, right, that's an ongoing process, right. You always try to optimize your company. But how much more time are you giving yourself with this very initial strategic review since you've just joined the company? And then my second question is thinking about this capital market briefing on November 6th. Do you feel like you'll be in a position to provide a new medium-term outlook to the capital market? And then my third question is going back to the market and environment. And what we're hearing out of the US is that firstly, increasing competition in the CRO space and then also more competitive pricing, which could obviously be a bit more of a structural problem going forward. How do you view the situation there? And do you stand by your statement that you're not losing market share this year? Thank you.

Thank you, Falko. And maybe to start with a strategic review. I firmly believe every company deserves a proper thorough strategic review every couple of years. Anyway, we've done our last one quite a while ago. So in anyway, even if I would not have come, that's a natural term that is now due. That said, I would try to answer it a little bit from a different angle. We will -- while we do this thoroughly, we will not wait for decisions that actually will help us improve the performance of the company. So I mentioned strategic review and I also mentioned accelerates the transformation program. And you've seen the company acting swiftly on the resets, which will deliver the EUR10 million this year and another EUR30 million on top next year. You should think about this a bit dual track here, while we will continue to look into opportunities to improve our performance, to drive productivity, hence, the transformation program. We will also look into the strategic aspects of our business. And obviously, this can ultimately mean that we will go back and further optimize our footprint or that we will decide that there is other levers to improve the company from a portfolio perspective. So the strategic review should not signal to you that we're basically now sitting for a couple of months doing nothing. On the Capital Markets briefing in November, obviously, we would like to give you a further update on our process of thinking. And we'll let you know in due course whether this would include further insights into next year. But at this point in time, I don't feel ready to speak about it. On the last one, US competitive situation, Matthias?

Yes, sure. Hey, Falko. Thanks for the question. I think I would love to give a little bit nuanced answer. First of all, we have to, in the here and now, we have high competition. I think you might remember a couple of months ago, when I introduced how we think about this market and called it a buyer's market. So let's not sugarcoat it, competition is high at this moment of time. So that is, however, a nuanced statement because not all elements in this market are actually price sensitive. So it's a big difference if we talk about, let's say, synthetic chemistry and FTE outsourcing or we talk about a tailor-made high-end biological assets. So as such, a competition is high that we are facing. And I think we are definitely, I would say, winning, I'm not able to say if we are gaining share in the more long-term integrated programs for the more transactional work. We have definitely the weakness we have been talking about. So that is a nuanced picture here. We are not afraid of given our productivity to compete. We have stable win rates. So we monitor that quite carefully across all aspects of our business and our CRM pipeline. Again, win rates are stable. So we feel we are not losing share because of those factories, but to acknowledge competition is high.

Thank you.

Falko, I hope that helps a bit with your questions. Then back to Judith.

The next question is from Stephan Wulf, ODDO BHF. Please go ahead.

Yes. Thanks and good afternoon. First one would be on cash flow. So in the previous quarters, we have seen a cash burn of roughly EUR80 million per quarter. So what do you expect here for the rest of '24 and also maybe looking already into '25? And then the second one is on the new RCF. You have mentioned preexisting covenants for the new RCF. Maybe you can share some details with us on these covenants. Thanks.

Thank you, Stephan. And all questions go to Laetitia.

Hi, Stephan. It's Leticia. So answering first with your question regarding the cash flow. What we expect and what we are targeting is a stabilization of our free cash flow trending towards breakeven for the rest of the year. So, yes, you are right. H1, we have not as good as we anticipated cash flow, but we have now measures and actions in place. And also, I would say, if we look at the liquidity level in H2 overall beyond the cash flow, we stabilize given the already confirmed payments that we mentioned in the presentation from BMS. And most importantly, the improving operational performance in the second half of the year. We have additionally plans to improve our cash position and you will hear more about our measures in the coming analyst call. Then moving to your second questions which remind me?

Revolver.

Revolver. So the refinancing we just did in July, refinancing with the main seven banks around EUR250 million facility that we get from there. And we are currently having for those ones a covenant around 375 at year-end. And that's the target we are currently looking at. And for now with what I told you regarding the improvement of operational performance as well as the payments that are already confirmed above EUR100 million from BMS that will come in Q3 and the additional plan that we have, we are having a strong plan to be in line with this covenant.

Yes. And covenant testing will be at the end of this fiscal year or?

December 2024.

Okay. Thank you.

Thanks, Stephan, and Judith.

The next question is from Joseph Hedden, Rx Securities. Please go ahead.

Good afternoon. Thanks for taking my questions. First one on the revenue mix in shared R&D, you've reiterated how Discovery order book is strong, but development is perhaps lagging behind in terms of performance. What proportions of the overall revenue within shared R&D with those to those different elements comprised? That's the first one. Second one, you highlighted despite the strong order book in Discovery in the first half, certain parts of the business in terms of revenue performance were weaker. I was just wondering what particular parts of the Discovery business are weak. And do you see recovery with those in terms of the order book or are there any logical kind of savings to be made there by not offering certain services? Thank you. Any detail if you can provide would be helpful.

Thank you, Joseph. The first one, I hand over to Matthias. You take the second one as well.

Yes, let me try and then Laetitia you can bid on it or Craig. Let's see what we have to add. Joseph, thanks for the question. I think in terms of revenue mix, I think we are not further breaking down our revenues into detailed sub-elements beyond shared R&D and Just - Evotec Biologics. We have been starting to talk about two elements in shared R&D discovery and development and it's roughly 70-30. 70% discovery, 30% development. Now I think what we had already, I have to remember in the full year or in the last call, because when we talked about the other part, I mean, where's the weakness, we talked about the transactional. Today, we use the word also of fast-turning elements of the business where we see the weakness. Those are also roughly 30%, but to make the complex story simply, it's not identical 30%. Because if you think about our development business, we have actually a highly attractive integrated product, so that's part of development. And part of development is very transactional, stability testing, whatever comes to mind. So the message that we bring across here is really strong value proposition traction on the more integrated offerings. Cross-functional longitudinal longer term and weakness, which sets partly in development and partly also on more transactional discovery services.

Craig, any further flavor from your side?

No. Only just to reemphasize that there are a number of components in the shared R&D offering, which are highly differentiated, highly attractive and doing extraordinarily well. Our disease area expertise or molecular patient database and PanOmics driven drug discovery. These are very high-value offerings in an environment which is competitive, but are also very differentiated. And when coupled with our full integration that leads to these multiyear strategic partnerships that Matthias referred to. That's what gives rise to our confidence in the future outlook of shared R&D.

Thanks, Joseph. I'm asking Udith. I think we have no further questions. It's 10 past 3. Just a final check.

Yes, I confirmed that there are no more questions registered.

Okay. Then I just for the process hand over to Volker for any final words. No. He's saying I'm going to close the session. Thank you very much for the attention and looking forward to see meeting or talking to you very soon. Thank you.

Ladies and gentlemen, the conference is now over.