Evotec SE (EVT) Earnings Call Transcript & Summary

Good morning. This is Werner speaking. I'm here together with our CFO, Laetitia, and I'm here together with Volker, who is in charge of Investor Relations. Giving a business update during the summer is essential because we want to have a true and fair view of our business at every moment in time. After experiencing our cyberattack, we have collected all information now. And with this, we are in a very good position to bring you up to speed with where we are in our business. And we will, out of our criminal cyberattack emerge stronger than ever before. If you go to Page 2 on the presentation that we have uploaded, you see that we have started the year with exceptional progress. And 2003 (sic) has shown us that it is possible to generate significant upfronts, significant milestones out of our innovation-driven transactions that we have closed with Bristol-Myers, that we have closed in the field of cell therapy with Janssen, that we have closed in the field of induced preprotein stem cells with Sernova and that we have closed in a huge technology partnership with Sandoz, where altogether, we are collecting milestones, upfronts and future significant royalties. This is very important because this is a strong element driving Action Plan 2025 where milestones play an essential role to drive profitability. So 2023 so far was an exceptional start when it comes to transaction, but it was also a year, or, as we have called it here, a coin of 2 sides. Because on the other side, if you go to Page #3, you see that on April 6, we were hit by a criminal cyberattack where the criminal cyberattack caused us to go the maximum security step for our partners. And with this, we decided to really contain all measures and to bring all measures in place to make the safest and best and most efficient Evotec ever for our partners. This does, of course, not come without cost, and that's the cost that you will see in the next couple of pages. What I can tell you now is that after an amazing reaction, and again, also on this situation, great thank you to our partners, but also great thank you to our internal team of how we handled the cyberattack, we are now back at a situation where we have all processes switched on or where we are in the process to have full visibility, how processes will be switched on. This is especially true for our development business, where we are still in the final stages of switching on all GXP systems to bring back our production as it should be. So from today's perspective, the cyberattack is behind us, and we are in full rebuild mode, which is, I think, important news for the next pages to follow. When it comes to the quantitative implication of this, let me bring you to Page #4 and at this stage, hand over to Laetitia, who will bring you into the start of the year and also how we now assess the situation.

Thank you, Werner. Slide #4, we had an exceptionally strong start of the year. As just mentioned, revenues in Q1 2023 executed EUR 250 million, which implies a growth of 31% versus Q1 2022. A robust underlying base business as well as the extended and the expanded collaborations with BMS in euro degeneration and the targeted protein degradation have contributed to this excellent performance. As the cyber hit us in the first week of Q2 on April 6, the entire Q2 2023 was impacted by the deliberate shutdown. While the data available is sufficient to update on our model for this year, which now comes with rather ranges at this stage, it would be too early to provide an EBITDA figure at this stage. All systems and the prioritization of forensic analyses before restarting the business led to a productivity of some 10% in April, the productivity improvements over the remainder of the quarter as well as the signing of the technology partnership with Sandoz resulted in revenues in the range of EUR 160 million, EUR 170 million for the Q2. The range we are providing today is related to the pending consolidation of local entities' results as well as the review of our auditors. But what can be said at this stage is that revenues have reached about EUR 375 million to EUR 385 million in the first 6 months of the year. Based on product levels seen over the course of Q2 and comparing results with internal forecasts, it's fair to assume that missed revenues amounted to approximately EUR 70 million in the second quarter. Moving to the outlook of the full year, Page 5. The incremental business derived from new contracts with BMS and Sandoz led to adverse payments that we are not initially applying in this order of magnitude. Our regular review of our economic situation, our order book and our guidance resulted in an updated outlook for 2023. We now expect revenues to come in the range of EUR 750 million EUR 790 million for the full year. The range is due to the fact that we need to analyze what the impact of changing demand patterns will be eventually. Those figures have not been reviewed by our auditors, as previously mentioned. While we are confident that we catch up these revenues based on the sales order book we have, which was a prudent approach of the widened range. Main moving parts are recoverable revenues as well as the underlying market dynamics and potential shift in demand. We will provide an update on August 29, while the release of H1 2023 results. Then moving to Slide 6 a pre -- already in pre to bounce back better and stronger, we started thinking of counterbalancing measures that are suitable to at least partially offset negative financial effects related to the cyberattack by implementing: one, a Value Protection Plan for immediate and recurring savings; two, an optimized capital allocation of our resources; and third, a strategic review. We started to continue investing in our 4 focus areas for technology leadership. This gives us a total sales identified of EUR 25 million in 2023. Turning now to the Page 7 to our outlook for adjusted EBITDA in 2023. We have 2 buckets of cost, one related to the cyberattack, one, of course, to rebuild the business for which we have a good but not a complete overview of cost as still, a few invoices are coming in. Our expectation is that the impact in 2023 will amount for EUR 25 million, which, in essence, is a one-off impact. The second negative impact of missed revenues, again, it's a one-off, after deducting variable costs would have an impact of EUR 55 million, EUR 60 million, which is resulting from a rather high ratio of fixed cost in our development business. On the positive side of the equation, we account for the positive effect of advance payments mentioned before in the bridge of revenues exceeding the initial budget and a positive net effect related to our value protection program, cost savings and efficiency program that we are committed to deliver. Based on this cascade, we set our new adjusted EBITDA guidance at EUR 60 million to EUR 80 million, which has also to be seen in the context of an accumulated amount of more than EUR 90 million one-off cost for which we do not adjust. We think that it is -- puts Evotec in a stronger position for starting the year 2024 in a much more robust setup, building the base for achieving our midterm goal as outlined in our Action Plan 2025. With that, I hand over back to Werner.

Thank you, Laetitia. If you go to Page #8 of this presentation, you see the full picture of our new guidance reflected. When it comes to our revenue numbers, we have to correct down to EUR 750 million to EUR 790 million. When it comes to our unpartnered R&D, we are correcting down to EUR 60 million to EUR 70 million investment into technology leadership. And when it comes to our adjusted EBITDA, we have to reflect the cyberattack with adjusting down to EUR 60 million to EUR 80 million in adjusted EBITDA. We also took EUR 50 million out of our investment program, which used to be at EUR 250 million because it's simply not possible to put all capacities online in the speed that we wanted to do this in '23. So -- but nevertheless, we are going forward with about EUR 200 million of investments in CapEx, especially for building our Just - Evotec Biologics manufacturing sites in Toulouse and in Redmond in the United States. So many of you then often ask us the question, how does this translate now into your long-term business? And if you go to Page #9, I think it is fair to say that our business is very well protected and long term, absolutely validly positioned. And with this, we are also confirming Action Plan 2025. Why do I say this? Because our exposure when it comes to market volatility, given our long-term transactions and given our upfront-bearing transactions and given our milestone-bearing transactions with many of our partners, it's different than for many short-term players in the industry. So with this, a long-term view on our business is possible. And with this, going above EUR 1 billion in sales is possible. Going to significantly higher EBITDA of around EUR 300 million is possible. And most importantly, building a co-owned pipeline with projects that are bearing royalties with over 250 projects that are typically holding royalties of somewhere between 8% and 10% is possible and we are fully on our way to create the largest [ oddity ] pooling industry. Translating this, as you see on Page #10, into a bridge on especially our EBITDA, I think it's always important to highlight that on top of our today's business, which you have been seeing growing over the last decade and every year above 10%, which this year, due to the cyberattack will not grow above 10%, but nevertheless, will grow, you will see that going back to a double-digit growth is absolutely valid into the future. You will also see that we have a clear operating leverage that we put into the business and a very strong plan for this. And we are, of course, not shying away from efficiency measures that we have to do to create the best value protection for our business. On top of this, you will see incremental income from the deals I already mentioned at the beginning that are significant. Don't forget, there are up to EUR 5 billion in milestones only behind the transaction on targeted point integration. There are more than EUR 4 billion in milestones only behind the transaction in neurodegeneration. There is significant milestones also behind our transactions that we made -- clearly that we made with Novo Nordisk and others. So that's why, of course, it's a variable bucket, but the bucket of milestones and upfronts and licenses is a significant contributor to Action Plan 2025. And on top of this, the capacity and the EBITDA contribution of Just - Evotec Biologics will kick in only after we have started the full production of our partnership programs in Just - Evotec Biologics and especially our J.PODs. So with this, we are well on our way for Action plan 2025. And we also, when it comes to Page #11, want to highlight that our business is also for this year, not closed. It's fully open for execution, and you will see strongness to come out of our 4 key areas, one of them being PanOmics; the second one being off the shelf induced pluripotent stem cells; the third is a paradigm shift in biologics, Just - Evotec Biologics; and the fourth is our end-to-end shared R&D platform. With this, we wanted to give you an update on our cyberattack and the impact of our business. And we are, of course, open for all questions that you might have, and thank you so much for following Evotec in the better days, but also sometimes in the not so good days, where we have to report impact on our business. Thank you so much. With this, we hand over to the operator and are more than happy to answer all questions.

[Operator Instructions] The first question is from Michael Ryskin from Bank of America.

I appreciate all the color there. I have a couple of quick ones. One, just going back to your commentary on the updated guide. If I look at Slide 5, one of the components you do factor in there in the bridge are changing market dynamics in the second half. It seems like it's about a EUR 20 million headwind. Could you just expand on that a little bit? That seems like that's sort of unrelated to the cyberattack. What's factoring into that? There's obviously a lot of chatter in the market in terms of what's going on in terms of demand from biopharma, but any additional color on that market dynamics point would be appreciated.

Sure. So what you should see is that especially the development business sees in our business, of course, an exposure to more transactional short-term business where given especially biotech funding, we see still a lot of demand, but we see slower decision-making, and we see also here a market where I think it is fair to say that from a typical sellers' market 2 to 3 years ago, we have now come to a selective or more selective buyers' market. And only a small part of Evotec's business is, of course, also exposed to that part of the world. And that's why, especially in the development business, we are also factoring in a little slowdown of the market environment. Of course, we see left and right what our partners at larger companies have reported, and we have also monitored that situation quite carefully. Nevertheless, our discovery business given our long-term contracts is very robust, and we also see a very robust sales order book for '23 in that part of the business, a very good outlook also for '24. Nevertheless, biotech funding, I think, is one factor that goes to your question. Second is a situation where the COVID overhang, yes, and also COVID spending is something that I think has normalized the market quite significantly in some parts of the business. And I think the long-term innovation trend that we are working on and that we are building is in the long term, not affected as much as the short-term less technology-driven part of the business. Last comment, when we look at our Just - Evotec Biologics business, of course, we have also seen here market reports, and we have also discussed with our partners here. At Just - Evotec Biologics, we are not competing for capacity in the market. We are representing a paradigm shift when it comes to more precise manufacturing of biologics and when it comes to higher cost-effective manufacturing of biologics. So that's why this is a different category in the market than where you -- from other partners have seen very soft markets. And I think our [ fund ] endorsement of our platform is one testament to that. The Department of Defense is another testament to that. And overall, yes, markets are not easier these days, no doubt about it. But overall, we feel that we are representing a very strong segment of the market. I hope that gives you a broader color.

Right. No, I appreciate that. And then a follow-up kind of related to that also, but it goes the phasing or the cadence of first half versus second half. If you look at what you achieved in the first half, if you exclude the cyberattack, it would have been a very, very strong first half, as you said, I think, 25% to 30% growth in the first half. And then even if you add back some of the missed one-off revenues and that catch-up, it's more of a mid-single digit for the second half. So it does seem like it went from what would have been a very back half-ended -- loaded year to a big slowdown. I'm just wondering, is there anything else that's not captured there? Are you maybe factoring in some more conservatism on customers coming back after you guys being offline for several months? Or just it seems like one half would have exceeded the outlook so significantly and yet, that's not showing up as you go through the rest of the year.

Yes. That's a very fair comment, but let me also again point you into the direction of our very, very fixed cost-driven development business unit. Yes? So the development business unit has a lot of fixed costs, switching that it on after the cyberattack and getting all the regulatory approvals is a process that really took a bit longer also that we have initially factored in. Planning for partners to go into our development business is really only possible when you can give firm time lines to deliver their experiments in time. So it's really this transactional business that is driving, more than any other part of our business, that softer outlook for the more executional business. That's the first factor that you really should see here. The second factor that you should see, yes, there is a very strong underlying drug discovery and drug development business, which doesn't come from short-term transactions, but comes from long-term transactions. And the last comment, we have not seen any partner not coming back at this stage. We have seen many partners who have in their decision making been a bit slower or a bit more staggered so that's why factoring in full campaigns of drug discovery and drug development is probably a bit more on the softer side at this stage. But also here, we are expecting biotech funding in the next quarters, not shortly, but in the next quarters to come back. We also see here quite good movement in many of the companies that we are working with. So that's why it might appear a bit slower in the second half, but that's really only reflecting the development unit.

The next question is from James Quigley from Morgan Stanley.

So I've got a couple of fairly quick fire ones. So is there any insurance recovery for the cyberattack that's already included in the guidance? Or could this be an upside and sort of what could you potentially recover? Then in terms of the EUR 25 million in cost savings you've identified for 2023, how much of this could be recurring? And to what extent, again, is this factored into the midterm targets? Could it be upside? Or is it now allowing you to get to the EUR 300 million following any step back from the underlying market as you discussed in the last question? Could you also quantify the proportion of the business that's exposed to the development site and development contracts? And then a final one, which sites will see or will be impacted by the reduced EUR 50 million investment? I appreciate there's a lot of distraction with the cyberattack, but what's -- have there been any other factors between the start of the year and now that has impacted your ability to invest, i.e., at the start of the year, GBP 265 million most possible and now, EUR 200 million is possible?

Thank you so much. I will take over the insurance questions. I will take over the development contracts and the site questions, and I'll then hand back to Laetitia for the EUR 25 million cost saving and the midterm target impact on recurring revenues there. So we are unfortunately advised not to disclose any insurance numbers and any discussions with our insurance. Sorry for that answer. These are ongoing discussions. And therefore, we are advised not to comment further than what we have done to that. When it comes to our development business, the total capacity available for development business is somewhere in the range of, I would say, EUR 150 million to EUR 200 million at this stage, with capacity that we are planning to even expand beyond that. So that gives you the total part of that business that is reflected here. And if you take a full quarter of basically not being able to deliver, then it shows you also the dimension of impact here. When it comes to our investment project, which sites are affected from that, we are, and I think that's important, at this stage, very selective when it comes to capacity expansion at all sites with the exception of everything that is capacity building for Just - Evotec Biologics. So here we go and continue to go full speed in ramping up Redmond, in ramping up Toulouse for Just - Evotec Biologics' investment. When it comes to sites where we are especially expanding capacity in chemistry or expanding capacity in our classical drug development and drug discovery offerings, we are not so keen to, at this stage, spend more than absolutely necessary, and that would mainly affect our sites in Verona, that would affect our sites in [ Guillon ], that would affect our sites in Germany as well. But again, we are talking here about a slowdown of capacity expansion, not a stop or anything like that. With this, I hand back to Laetitia.

Yes. Thank you and answering your question regarding the cost savings. So we have implemented a Value Protection Plan for immediate impact this year totaling for EUR 25 million. Part of this EUR 25 million already implemented is recurring, a part is not. And that's why we are, in parallel, starting an efficiency program and restructuring program to make sure that we have embedded in the 2025 strategy planning, recurring savings. We are really into fine-tuning all that for the midterm efficiency program. So we can't commit at this point of time on how much it concerns, but at least already EUR 25 million this year, recurring and nonrecurring, and the objective is to get this already fully into the equation of 2025 for the years to come.

Can I just...

And that would represent a bit of upside to also illustrate that.

Got you. And can I just quickly clarify because with the EUR 150 million to EUR 200 million capacity, can you repeat what you said about how much the impacted or -- and the impact? It cracked up, I heard quarter, but I didn't hear how many quarters.

No, 1/4. 1/4 of that.

The next question is from Lucy Codrington from Jefferies.

Just a few left. Just on the shortfall, was most of that lost contract revenues? Or does that also include any lost milestones? I think you've already answered this, but your customer retention rate hasn't been affected. And then just in terms of the EUR 70 million in lost revenues, some of those are potentially recoverable. Is that right? So these revised aims are worst case? Or do you already include recoverable work in the revised aims?