Evotec SE (EVT) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us. It's my pleasure to introduce, on behalf of JPMorgan, our next speaker, Werner Lanthaler. Please note that we will be hosting a Q&A session in the Kent Room after this. With that, I will hand it over to Werner.

Good morning. My name is Werner. I work for Evotec. Thank you for coming. As I see so many highly qualified chemists, molecular biologists in the room, I hope you don't mind that we focus this presentation more on the strategic elements of Evotec, what we as a business model represent and where the company is strategically going. When you see the first slide of this presentation, you see Evotec is a partnered drug discovery and development company. If you think about that and if you think about this industry 20 years ago, that was not the norm because everyone did everything in their silo alone. So what we have really brought as a paradigm shift to this industry, the idea of getting more efficient, more progressing when you do something together in this industry. And with this, let me bring you into a short overview of our company, into what we think partnered drug discovery is all about, and then I'll give you a roundup on our financials and what the next years will bring. Manfred Eigen is the scientific brain leader and founder of Evotec. He got the Nobel Prize for one thought: What would happen if evolution is not happening in a linear fashion but in a parallel world, where many experiments are not done one after the other, but where all of a sudden, you do things in parallel and you progress in parallel? This would radically change speed. And if you want to cure diseases and you can radically change speed, then you are mentally arriving what the whole vision of Evotec is. We design and apply innovative technologies and processes across all modalities in order to expand access for more precise and more efficient medicine together with our partners. This is a long sentence, but it captures everything that we want to represent for you. And it doesn't stop because Evotec will only stop at the moment when there is no more disease out there that has to be cured. And if you now look at the next page of this presentation, you should see that we are building a co-owning model with our partners, where, today, Evotec owns more than 100 products and product candidates and targets together with our partners, where we always own significant royalties on all these projects and that we're all progressing forward. That's essentially the largest portfolio that is currently built in this industry in a systematic, unbiased and comprehensive way coming out of our discovery platforms. The company, here you see a transition in the last 5 years, is growing. And just to illustrate this growth here, you see a few numbers compared from 5 years ago to now. And one number that is probably worth mentioning, 5 years ago, we were 1,000 scientists working for the company, now we have 3,000 scientists working for the company. And this growth is driven by a mega trend, where the mega trend is just at the beginning. So what we are doing is just starting, and that's why also you can expect all these numbers to be significantly larger in the near future. Why is it just starting? Because one thing is absolutely clear to everyone in this room and everyone around this conference that the productivity challenge in our industry will continue and be even fiercer than ever before because precision medicine, which is great for us, ultimately will make much better-defined markets. Developing a drug will not become significantly cheaper, but the markets that we can address will become much better defined. And with this, the productivity challenge will increase, and therefore, we have to all ask ourselves what can we do here. And the easiest way to address this is to basically switch wherever possible to a capital elasticity-driven business model. That sounds a bit technical, but it's very simple. You just don't produce fixed costs where you can do something faster at variable cost with a highly qualified partner. And Evotec represents this partner in the early-stage drug discovery and development area, and that's why we are 100% focused with our company in all modalities. And why are all modalities so important? Because only if you had a platform that can work in small molecules, that can work in biologics and that can work in all other modalities, like, for example, cell therapies and gene therapies, you become unbiased and only have the best solution for your partner and the patient as an incentive and not that you are just permanently selling capacity. So this all-modality approach is unique in the industry and is something that we have put along the value chain in a very, very efficient step starting from drug discovery target identification into an IND-enabling process in a way like no one hasn't done it before that we are 100% focused with our 3,000 scientists only doing this. And what we then also do, we can provide commercial material once you're convinced that the drug that you want to make should be really manufactured. So it's really the principle of the autobahn, that you do something where you can be truly efficient, where you can go really fast because the Germans don't have a speed limit on the autobahn, and that's how you have to think about it. Take out the speed limit and do everything in parallel that can be paralyzed, because then you are really following the idea of making drug discovery truly efficient. And only if you make it truly efficient, you will bring down cost of capital and you will bring up return on investment in drug discovery to dimensions where it is currently not in the pharma industry, but where we all have to bring it in order to make drugs going forward. The 3,000-people expertise that we bring to the company are here in these locations, and it has become a very beautiful global footprint that Evotec is partnering, and therefore, you should see also here a company that is scalable in this footprint. Important on our business model is that we build very long-term partnerships in whatever is the best way to work together with our partners. For some of our partners, it's the best way to access our platforms in a fee-for-service basis, and for other partners, it's better to access our platforms in a co-owned model. Important, it's always the same platform. It's just a business model that we tailor to the needs of our partners or to our own demand. That's a very brief overview of how the company is set up. And now let me bring you a bit into the dynamic behind this company and why this is just the beginning of making better drugs faster with our partners. And the key reason of this is here, that we have, in the last 10 years, built the understanding that when you have better information at the beginning of the drug discovery process, your end product will be so much more efficient. So what we typically start with is a human genetically educated target. And if we can add a biomarker to such a target, you can see that by twofold is the increase of probability of success on genetic additional information. And by threefold increase, you can see progress when you have a biomarker on top of that. And if you ask this question at the very beginning of the drug discovery process, everything downstream becomes better. And this everything downstream is then the platform that we have built, and one way to access this platform is where you bring the intellectual property, that's then what we call Evotec Execute, or when we initiate the intellectual property, that's what we call Evotec Innovate. It's always the same platform. It's basically 2 doors that we're opening for you. And together, we can then open many more doors, and these many more doors you can access at every moment in time along the value chain where you need something that progresses your target or your idea. And with this having the capability, along these 12 aspects of the drug discovery value chain, you basically create the shared economy where the platform is always learning when we're doing something. And because our platform is always learning, we have one number that you should please remember, that is 72% of -- sorry, 92% of everyone who is working with us and has ever done an experiment with us, does the next experiment also with Evotec. And if you have a return rate of your partners with 92%, then, of course, you can grow, which we are doing, much easier than if you have to look for your customer every time at the beginning of the year and start from scratch. 92% of people who work with Evotec always come back to the platform. Who are these 92% of customers who always come back? It's basically 19 of the top 20 pharma companies, it's more than 300 biotech companies and it's more than 15 foundations who work with us. And this is just illustrating to you that we build high-performance alliances with pharma and also other partners in this industry. And the number that is driving this return rate to the platform is that you are 30% faster to your data point and 30% more efficient at a high-quality data point that you don't doubt anymore that's a reproducible data point. And this then is creating a platform where people, all of a sudden, have a plug-and-play trust situation. And this plug-and-play trust situation is on one-hand side positive, on the other hand, it's also leading to quite an interesting JPMorgan experience that many of the companies who work with us are sold always at JPMorgan for whatever reason, yes? Last year, Loxo; this year, Dermira; the year before, many others. So it's really the situation where the same partners are meeting on this platform all the time, and that's why you trust the data, and that's why it becomes truly efficient. This was the idea that originated out of small molecules, and then, of course, it's completely logical to extend this to other modalities. And that's what we have done by basically optimizing something in small -- in biologics, which was generated by a company called Just, now called Just-Evotec Biologics, where in the bull's eyes of their idea is a machine learning algorithm that is called Abacus, which is generating more efficient antibodies than anyone has ever made before because you optimize your antibodies before you bring them downstream and then bring them into full commercial-scale manufacturing. So this machine learning tool allows us to optimize in all 4 dimension antibodies: on quality, on speed, on cost efficiency and also on flexible capacity. And if you can do this in the world of antibodies, all of a sudden, productivity of antibodies will go up, costs will go down, and with this, access for medicine that is antibody-driven will be much broader in the future. That's driving our engagement in biologics dramatically. And here, we have committed to build massive capacity in that space, massive capacity in the world that we are starting really to transform old fixed-cost silos into the factories of the future that will be called J.PODs. And we are very happy that MSD was the first company to acquire an option to work together with us in learning how the J.POD works. And MSD will only be the first company to take such an option. There will be many more to come, and you're also invited to do that because this will be the best antibodies that you will be producing in the future. One step back, don't forget, our model is always driven by co-owning what we are doing together with you. In the last 9 years, we have created a pipeline where we are co-owning drugs, where Evotec typically is generating drugs then partnering off these drugs for the clinical development that is done by our partners. So the cost of clinical development is with our partners, the commercialization is with our partners and our partners then are putting royalty rates forward to Evotec once these things are on the market. Let me just highlight 2 or 3 of the pipeline projects that are going forward here, yes? We are very excited about the P2X3 target, which is transitioning into the stage where you will see P2X3s on the market very soon. This is driven by Bayer, and Bayer will use P2X3 in the field of women's health, will use this in most likely also chronic cough and in many other indications where P2X3 has shown in Phase II a very, very good profile. And we will hear more about this from Bayer, but I'm very excited that this project will be a project which will go forward. And when you then -- as Evotec can really appreciate double-digit royalties once this is on the market, that's, of course, the beauty of a large portfolio of co-ownership. So this is one portfolio that we're building. If you look at this, in the clinical stage here, you will see multiple transitions going forward from Phase I into Phase II in 2020. You should really watch out for our portfolio that we're building in oncology here. You should watch out for our preclinical portfolio. We are in diabetes in the cell therapy approach on beta cells. We have really generated data that are outstanding, which we have reported at the beginning -- at the end of last year. And if you now look at this next page, we are already now, and I apologize for that, it needs 2 pages to show the pipeline. Actually, next year, it might be 3 pages to show this co-owned pipeline. But that's not the limitation. What it really does to you, it shows that you're -- if you're focused in drug discovery and if you multiply your outlets with others, then it becomes scalable. So together, we are opening doors with whoever wants to make a drug going forward, using our platform here at Evotec, and that's why you will see these discovery projects going forward. If our partners don't progress for whatever reason, all rights fall back to us, and then we can either partner with someone else or progress alone. But that's essentially because our spirit that we want to bring to our partners is that everything has to be permanently fully invested because the patient hasn't time to wait, and that's what we have to represent in this pipeline. Why is this pipeline, from a quality perspective, completely different than many others? Because we start where we are really all supposed to start, that we go back to the patient. We are collecting patient data. We are building databases. And from the databases, we create clinical and molecular profiles. In the field of women's health and you here have the CEO of Celmatix sitting in the first row, we are so proud, for example, that a company like Celmatix has built a database that now can be progressed on Evotec's drug discovery platform. In the field of CNS, we have built a multiple-driven network, where we are collecting cell lines from many partners and build the database that ultimately are the starting point for our induced pluripotent stem cell platform. And we do this in many different disease areas. And just to highlight another one, in kidney diseases, we have collected 6,000 patient samples together with the NURTuRE consortium that are then going forward on our discovery platform. So that's why we are redefining the status of disease and health and bring this together as drug discovery processes. I already mentioned you cannot leave this room without hearing that we think and have increasing proof that our induced pluripotent stem cell platform is the gold standard in creating novel starting points in the disease areas where we use this technology. We have here multiple partnership setup. It's worth mentioning that we are super happy that Celgene, now BMS, is progressing on even higher speed than ever before our neurodegeneration portfolio. We have a large portfolio of partnership also in diabetes, and you will see many more partnerships coming out of this iPS cell platform going forward. We don't go into the science of this now, but be invited to look at how this is working, and it is coming to the gold standard of assay development that we have established here. So once you have established such an autobahn, it's almost the obligation to let as many people as possible drive on that. And that was, for us, the idea to say, "Why don't we open the autobahn and finally create a structure to make industrial standard translation of academic projects to this autobahn?" And that's where our concept of BRIDGEs comes in because that's the direct link from a brilliant academic idea to the industry standard, where if you cannot replicate a data point, then you just don't drive forward on the autobahn, but then you have not created any fixed costs and you have the fastest readout if you want to go forward, if you don't want to go forward. In 10 years from now, no academic on the planet should not have access to an autobahn like this because that's the obligation, yes, to bring science to the patient when you have great basic science ongoing. And if you have this autobahn, then it's also completely logical to sometimes participate with companies who should go to these autobahn or where we think that they're doing something where Evotec should participate in the evolution of their technology. So that's why we currently own 12 companies with a fraction of these companies, but we are aligning the spirit of these companies with our drug discovery progress and then bring these companies forward. These are just the logos of these companies, and there's always a true operational synergy that we are driving forward here with them, and you will hear a lot of these companies because this will be the IPO candidates of the future that you will then be hopefully able to invest in. Currently, Evotec is invested in all of them. This brings me to a bit of our financials. We are -- what is driving our financials? It's really a customer base that is very diverse now and very loyal and very good. And if you have foundations, if you have biotech companies and if you have pharma companies in the mix here, and it's really becoming a very strong mix, then you have a very good mix between all geographies, then you can say that this drug discovery platform is becoming truly well balanced, and well balanced for also -- for us means translating into good numbers. I think it's even fair to say very good numbers. This company is growing every year since the last 9 years by more than 10% on the top line, and this company has been profitable in every quarter, increasingly in the last 5 years. And we will continue to do so because we see the strongest order book ever for 2020 and '21 already because the visibility of our partnerships typically is increasing because we closed very long-term contracts. We closed 3-year contracts, 5-year contracts, 7-year contracts, partly, and that's why we see that our order book does not end, it's actually the opposite. It's getting better and better and better filled than ever before. So that's why, here, we make 2 arrows showing up on our revenue lines for next year because that's what you can expect. It's going to be really good. Having said that, we will spend more money in R&D and in building capacity than ever before in 2020. And that's the commitment to innovation that we want to give, and we do this on a very nice profitability, which is also increasing as you speak and as you see, and as you will see also going forward. And we do this at very high gross margins because one thing we don't do, we never touch anything where our gross margin would be below 25% because our opportunity costs would be too high if we do that. Everything is driven by the best people, and we have 3,000 of the best people in this industry, and we are increasing about 400 scientists a year at this stage, 400 new scientists who will join Evotec going forward. So that's really where force is coming together and where it becomes a portfolio effect to the positive for everyone if you can bring all these scientists together. We have a great team of shareholders who are supporting us. We have a great team of a Supervisory Board that is supporting us, and we can say that our numbers from last year will be easily achieved when it comes to our guidance from 2019 that we have given out. And going forward for 2020, you will see that we expect what we do to become even broader, even bigger and even further accelerated in both segments in Execute and in Innovate. You will see this multimodality trend, really kicking off by not only going forward with just biologics in the discovery area but also transitioning this into the manufacturing area. And we are also fully committed to our academic partners, and we'll build more BRIDGEs as we speak. Let me round off and invite you to the 8th of April, where, for the first time in a long time, we will show you a bit of detail of our science that is driving this platform. So on the 8th of April in New York City, we will give an R&D Day where we want to be a bit technically on the one hand side but show you the full scientific potential of these platforms, and if you come to the Alexandria Center there, it will be my pleasure to host you. With this, I wish you a fantastic end of the conference. Go for this one more meeting that is ahead of you, and then fly home and enjoy the rest of the life. Bye-bye.