PolyPeptide Group AG (PPGN) Earnings Call Transcript & Summary

So thank you for joining our hybrid event this morning. I'm joined by Raymond De Vre, our CEO; and Jan Fuhr Miller, our CFO. I draw your attention to the usual disclaimer on Slide #2. Raymond and Jan will walk you through the presentation. And at the end, we have the Q&A session. With this, I hand over to Raymond.

Thank you, Michael. Good morning, everyone, and thank you for participating to our first full year announcement of PolyPeptide as a publicly listed company. Jan, Michael and I are sitting here in the office of the Swiss Stock Exchange, and we're happy to be presenting to all of you today. I'm Raymond De Vre. And as most of you know, I took over as CEO of PolyPeptide a little bit less than a year ago on April 29, the day we went public in this very same building. And I can say that in many ways, '21 has been an exceptional year for PolyPeptide but also for me personally. We had a successful IPO in the middle of managing a leadership transition. But more importantly, we did manage to keep the business momentum. And this reflects well on our capabilities, on our execution mindset and on the strong customer focus of our organization. And for that, I would like to thank all the employees of PolyPeptide in the U.S., in Europe and in India for their resilience, enthusiasm and dedication to our customers. Let me start by providing you with a quick summary of our financial performance here on Page 5, and Jan will then give you a lot more detail and insights thereafter. We grew our revenue by around 26% to reach a level of EUR 282 million. This is mostly driven by our custom projects in Phase III, including a substantial contribution from Novavax. We have indeed continued to expand our project pipeline now including 196 active projects as per the end of 2021. Our adjusted EBITDA grew by 42%, reaching a margin of 31.3%. The result for the year grew by almost 50% with a basic earnings per share of EUR 1.47. We did accelerate, as we announced last year already, our capital deployment to meet our future capacity requirements, and our capital expenditures in 2021 reached slightly above 27% of revenue. Our oligo R&D and GMP pilot plant facility is established, as we had announced, with a dedicated team in the U.S. in Torrance, and we have started working on our first customer projects. Finally, we will be proposing a cash distribution of CHF 0.3 per share at our Annual General Meeting 2022, which will take place on April 26. This being in line with our announced dividend policy. Jan, I will now let you provide with more details and insight on our financial results for 2021. Thank you.

Thank you, Raymond. Very happy to share our first full year results since our listing back in April last year. So let's take a deeper look into our financial profile for 2021, as you see here on Slide #7. So this slide here provides the reported full year development of our total revenue and reported EBITDA from 2018 up to 2021. We see a financial profile characterized by strong growth and profitability, maintaining this momentum in 2021, while completing, as Raymond mentioned, a successful IPO and conducting at the same time a smooth leadership transition. So reaching revenue of EUR 282.1 million for 2021, highlighted here on the slide, to the left, the revenue growth of 26.5% compared to 2020 is driven by a significant increase in our production volumes. So last year, we doubled our output in operations compared to 2020, with a positive tailwind coming from COVID-19 projects, all of this while maintaining a very strong focus on customers and building on our technical capabilities. To the right, I'm pleased to share with you the reported EBITDA here. Again, a strong momentum for 2021, providing us with an EBITDA of EUR 84.8 million, equal to a growth of 37% compared to 2020. And this is also a clear display of the operational leverage that we have achieved through higher capacity utilization and improved productivity combined with a favorable product mix. On the following slide, which is Slide #8, we present the development of our business segments from 2020 to 2021. So our strategy is to continuously grow our pipeline, so facilitating future growth of our commercially approved peptides. So I'd like to start by drawing your attention here to the development in our Custom Projects business segment. So between 2020 and '21, we increased our sales coming from our pipeline building projects, meaning our preclinical projects all the way up to Phase III with 63.9% generating revenue here of EUR 167 million. This increase is driven by the progress of a number of late-phase projects, including substantial contribution coming from Novavax, as Raymond mentioned. This is also combined with the fact that we have further increased our project pipeline up to 169 active projects by the end of last year. Our strong, late-phase pipeline of 30 projects is expected to contribute to our commercial business segment, our Contract Manufacturing, as you see here in the middle, in the years to come. For '21, the sales in this business segment, as you see, declined by minus 10.5%, here driven by the life cycle trends in some of our mature products. Our Generics and Cosmetics business segments seen here to the right on the slide grew in 2021 by 21.2%. Here, it's driven by the higher volume sales of some of the generic peptides we manufacture. We also continue to build our generic business, having filed several new DMFs in 2021 and working on the development of a number of new generic peptides. Our ability to generate operating leverage by driving economies of scale with a healthy level of utilization can be seen on the next slide, which is Slide #9. So here we see we have expanded our EBITDA. We've expanded our EBITDA from EUR 61.9 million in 2020, as you see to the left on the slide, to an adjusted EBITDA of EUR 88.2 million in '21, which is resulting in a margin of 31.3% of revenue, which, again, is up by 3.5 percentage points compared to 2020. We achieved in '21 a high revenue growth based on a favorable product mix, as I mentioned, also having a positive impact on our EBITDA. Our business strategy continues to focus on ensuring that our assets are utilized at a solid level across the group. So the execution of this strategy, combined with the focus on driving economies of scale and optimizing our operational activities where possible. These are also factors behind our growth in profitability. Again, this can be seen from the graph here with a relative lower increase in our cost of sales and operating expenses relative to the growth in our total income, providing us with a growth of 3.8 percentage points of our gross profit margin compared to 2020. As mentioned already at the half year result, we had a few one-off items in '21, indicated here on the graph to the right of the adjusted EBITDA bar. So the first item equal to the EUR 2.4 million is related to 2 loans made available by the U.S. government during the early phases of the corona pandemic to aid businesses operating at a normal basis. These loans were waived by the U.S. government during the first half of last year. The second one-off item consists of the IPO-related costs amounting to the EUR 5.7 million. Of these EUR 5.7 million, around EUR 1.4 million are consultancy services provided to polypeptide, leading up to our listing in April last year and the remaining EUR 4.3 million are IPO cash and share bonuses awarded to some executives and some nonexecutives in connection to the IPO. So this leads us again up to the reported EBITDA of EUR 84.8 million, equal to an increase of 37% compared to 2020. On Slide #10, we have provided a summary P&L presenting the development here from 2018 up to 2021. As noted here, our 2021 operating result reached EUR 64.2 million, equal to a margin of 22.7% of our revenue which is substantially over 2020. The decrease in our financial expenses are driven by the exchange rate and also the lower interest on the contingent consideration related to the Lonza royalty payments. The effective tax rate for '21 -- for 2021 ended up at 21.0%, which is comparable to an effective tax rate of 16.9% in 2020, here driven by the higher taxable income combined with a stable R&D tax credit in the U.S. Finally, our result of the year for '21 came in, as you see, at EUR 47.3 million, equal to a margin of 16.8%, which, as Raymond mentioned, represents a basic earnings per share of EUR 1.47. So now let's move on to the development in our cash flow and cash position on Slide #11. So we are focused on growth. And as you saw with the IPO, we now have further strengthened our capital position. Very solid growth coming from our net cash flow from operating activities here, excluding net working capital after EUR 76.8 million with a change of net working capital of minus EUR 19.5 million, as you can see here on the graph. This is then offset by the cash that we have used for investment activities amounting to the EUR 77.7 million resulting in a free cash flow of minus EUR 20.4 million between December '20 and December '21. The outflow change in our net working capital of the minus EUR 19.5 million is a function of mainly 3 factors. So number one, our inventory increased close to 20% due to the growing business, the proportionally lower increase compared to the growth in our revenue. The second factor, an increase in our trade receivables balance of close to 22% compared to the balance of 2020 -- end of 2020. And also noting here that December 2021 was an all-time high sales month for the PolyPeptide Group. And finally, an increase in our contract liabilities or advanced payments from our customers of over 37%, indicating additional customer commitments secured going forward, especially related to some of our late-phase projects. During the second half of last year, we also repaid our term loan. Our term loan of EUR 25 million, which is indicated here on the graph under other. Our IPO at the end of April '21 generated a net inflow of cash equal to the EUR 172.3 million, again strengthening our capital position and finally providing us with end of December '21 cash balance of the EUR 136.3 million. Our focus on executing investment initiatives to support our growth going forward can be seen on the next slide, which is Slide #12. We have generated CapEx of EUR 76.2 million (sic) [ EUR 76.7 million ] or 27.2% of revenue in 2021 equal to investments, both in PPE and intangible assets that have been capitalized during this reporting period. This is equal to an increase in EUR 28.5 million compared to 2020. During '21, we had a number of ongoing critical investment projects that we have accelerated and will continue also during 2022. Some of these projects are the expansion of our large-scale solid-phase synthesis capacity at our site in Belgium and our downstream capabilities at our site in Sweden. We are also in the process of installing several lyophilizers across all our large sites. And we are continuing to build our oligonucleotide capabilities at our Torrance facility in the U.S. Furthermore, we have several ongoing global digitalization initiatives that are being executed. On the next slide, which is Slide #13, I'd like to share with you the development in our return on net operating assets being one of the key financial return metrics we use at the PolyPeptide Group. So let me start by briefly elaborating on the RONOA definition that we use for our reporting also to be seen here on the slide as a footnote for your reference. Our return on net operating assets is defined as the last 12-month operating result as a percentage of the average net operating assets. So a strong '21 provided us with an operating result of EUR 64.2 million, as you saw, compared to an average net operating asset base of EUR 305.8 million. This is resulting, as you see in a RONOA of 21.0% for December 2021 compared to 18.2% RONOA in 2020 and 15.3% in '19. As shown, this is clearly driven by the higher growth in our operating result relatively to more modest growth in our net operating asset base. Mentioned also on the previous slide, we are accelerating some of our ongoing CapEx initiatives, therefore, also growing our net operating asset base going forward. Now let's move to the dividend proposal, which you find on this slide, Slide #14. The result for the year in 2021 was EUR 47.3 million, as I mentioned earlier, or CHF 48.8 million, as indicated here on the left side of the slide, with earnings per share of the EUR 1.47 for '21. The Board of Directors will propose to the AGM, a cash distribution of CHF 0.30 per share, representing a payout ratio of 20.3% of the result for '21, and this is consistent with our dividend policy of a payout ratio of between 20% and 30% of the result for the year. Again, this accounts for a total proposed cash distribution of CHF 9.9 million. So now I'm pleased to hand back to Raymond, who will provide you with some additional insight into our strategy, our priorities and our outlook. Thank you.

Thank you, Jan. Thanks for sharing a summary of our financial performance in 2021. Let me now focus on the future and be forward looking. We are now on Page 16, and I wanted to start by sharing a little bit of views on how we are conceptualizing our integrated strategy. Our group's mission is ultimately to help customers across the world secure approval and successfully launch and commercialize their products in the market while being flexible to adapt to the inherent uncertainties of drug development. In doing so, we're proud to contribute to the health of millions of patients across the world. Our integrated approach is articulating along the following dimension as illustrated on Page 16. At the center is the customer, customer first, which is, as I said, at the center of everything that we do. The group strives to maintain a high level of customer satisfaction across all relevant dimensions, including expertise, delivery, customer service, quality, execution and so on. We serve a growing number of small and large customers and continuously invest in our infrastructure, processes and people to meet customer expectations. On the right side, go for growth. Growing is key, is key for us in the future, but ultimately is key to support our customers. We continue to believe, as I will illustrate in a second, that the core business of peptide remains a vector for future growth. Upcoming patent expiries provide opportunities to further develop our peptide generics API business and with the decision to enter the emerging market of oligonucleotide-based APIs. The group does aim to address unmet needs of customers, thus unlocking another avenue of growth in the future. On the left side, we can't do this if we don't drive innovation significantly. That's where the value comes and that's where -- thanks to that, that we can bring innovation to our customers. And this is closely related to leading-edge capabilities in providing our products and services effectively, efficiently and responsibly. To that end, we have a holistic program of innovation to ensure that our manufacturing process as well as analytical capabilities stay at the forefront of technology. An important element, as I will describe in a second, is our ambition to implement a group-wide green chemistry program to reduce the environmental footprint from our activities. As an overarching team, OnePolyPeptide, the group strive to continuously optimize internal collaboration, seeking the right balance between local entrepreneurship and global coordination. PolyPeptide seeks to continuously reinforce our OnePolyPeptide culture, but also to build solid global foundations, processes, systems that are required to ensure that growth is sustainable. Finally, we do recognize, obviously, the importance of ESG, and we decided to pursue an integrated strategy to incorporate all material ESG aspect as part of our priorities under the umbrella of responsible partnerships. PolyPeptide conducted a materiality assessment at the end of last year leading to selecting several material topics that have been clustered under the headings of sustainably partner, employer of choice and business excellence. Let me go through each one of these items and provide a little bit more details now. Customers first, here on Page 17. As I've said, and I will repeat and this will always be our focus, PolyPeptide aims to be the preferred long-term partner for all our customers, small and large, who typically expect deep operational expertise and scientific knowledge that we can offer, coupled with the relentless focus on quality and high delivery performance. As Jan mentioned, we did double our manufacturing volume in '21 versus '20. And we did so while managing also to further improve both our overall on-time-in-full performance to 95% as well as our Net Promoter Score to 75%, which is done through an external third-party audit, which continues, in our opinion, to reflect an effective customer engagement from our side. As I said, we do want to continue for growth. We want to go for growth, as illustrated on Page 18. And as I mentioned before, we continue to believe that core business of peptides -- peptide-specific drugs remains a significant growth driver for the future. We continue to see biotech and pharma companies investing into peptide-based R&D. You see this on this chart with a number of peptide drug approvals in the respective period, and that trend does continue. It's worth noting once again that peptides are being used in an increasing number of indications and medical conditions, obviously, metabolic diseases, which is well known, but also oncology, infectious diseases, orphan diseases, cardiovascular and even neurological applications now. And -- sorry, and this is also because new innovative technologies, such as some that are illustrated here are being developed to expand the application of peptide-based therapies and improve their performance, whether it's selectivity, bioavailability, delivery, half-life and so on. As a result, as per global data at the end of 2021, there are now roughly 250 drugs in clinical development and more than 50 -- 500 in preclinical phase. So our focus, as mentioned earlier, does remain to grow by expanding our pipeline, trying to serve as many customers as possible in their pipeline needs. Consistent with this strategy, we have built a pipeline of projects today at 196 active projects compared to the 181 that we had announced at half year. As mentioned by Jan, this also increases our confidence and hence, have decided to increase capacity more rapidly than initially planned and to accelerate investment across all our main locations to be able to serve that pipeline in the future. As I said, a high number of peptides coming to market now also means a higher number of peptides going off patent in the future in the next decade, indicating that the generics peptide API is also a growth factor in the years to come and for us in particular. I'll now move to Page 19, which is the oligo. Now we have said it before, we took a decision to enter into oligos. And our growth ambition does include the expansion of our capabilities beyond peptides into the emerging market of nucleic acid-based therapies. They are a promising new modality that also has hundreds of compounds in development today. And these products, oligos, are synergistic with peptides, giving the overlaps in development and manufacturing capabilities. Over the past few months, we have been talking to many customers as we have launched our oligo at PolyPeptide branding. And these -- all these conversations have confirmed that there is a true unmet need here for customers. They do need help to develop new oligos in early development. So in 2021, an R&D and GMP pilot facility with a dedicated team has been set up in the U.S. in Torrance at our facility in California, and we started our first customer project works. Our group strategy, as announced last year, including during the IPO, remains one to build a portfolio of early-stage oligonucleotide custom projects and to develop the business over time with infrastructure with a rather long-term perspective. We are absolutely committed to providing enough capacity going forward to also meet the demand for oligos. In our first building in our facility, we do have, as I said, the R&D and GMP in pilot, we have 3 lines there on site and operational. And we have already committed to adding lines in that building to triple output. We do have a second building recently leased where the evaluation of SAT expansion is ongoing. In fact, we have done an engineering study to add large-scale process lines for multi-kilogram batch production already. In addition to oligos, we're also making good progress in our personalized medicine neoantigen product platform, where we are seeing increasing clinical trial activities in oncology in the U.S., requiring us to provide support to more individual patients that are part of these trials. Let's move to innovation. I think it goes without saying it's true in our industry more than anywhere else, it is of utmost importance to keep investing in innovation and new technologies to stay ahead of the curve. We have a program covering different dimensions, but here, I would like to focus on green chemistry. And we have decided to implement a green chemistry program along with a green office type concept. We have defined a multifaceted program to address this challenge, and we have to recognize green chemistry is a technically complex challenge that will require us to work with partners, including academic institutions, startups, industry associations, and of course, customers. To that end, our program is articulated around a reduced, recycle, replace, avoid concept, which is aligned to the 12 well-known principle of green chemistry. We mentioned here a few examples of work that we've already been doing and published in the scientific literature for illustrative purposes. Indeed, the search for green solution has been on for several years now as an opportunity to improve process performance and to reduce the environmental footprint. We have identified, for example, optimization opportunities in some of the rinsing steps. Just to mention one example, through innovative percolation practices, we were able to show that we could reduce the consumption of solvents by 70% compared to standard practice. But I think now it's time for us to commit to making since a priority at the group level and to expand these new technologies and new approach to as many products as we can as part of innovation and our ESG commitment. Finally, overarching this is our OnePolyPeptide approach. I think just to go back a little bit to our company, I believe that one of the trends of PolyPeptide comes from having multiple sites of different sizes in various geographies. And this offers us flexibility and agility to meet specific demands from various customers across the world. The sites are really the face of the customer at the end of the day. That is where the interaction takes place and where the products are being made and the services are being provided. So it is important to keep that flexibility in local diversity, which is really integral to the DNA of our PolyPeptide's culture. But at the same time, as we grow, it is important to find the right balance in regard to global integration and coordination. And we will keep working on finding that balance between OnePolyPeptide priority in local diversity. In particular, it does mean that we are investing and we'll continue to invest on integration of systems and processes, including, as Jan mentioned, IT, automation, digitization, but also processes and functions, such as talent management, vendor qualification, enterprise risk management, quality system and so on. And as I said earlier, I'm a strong believer that these platforms need to be in place on a global basis if you want to sustain your growth. In particular, effective January 1 of this year, we have implemented the PolyPeptide management committee as an extension of our EC, executive committee, to coordinate the implementation of our strategy going forward. In the sense, including creating new functions as well as getting new people in leadership roles. Finally, corporate sustainability. It is obviously of the utmost important nowadays. In PolyPeptide, we do strive to adjure to the fundamental principle of business ethics, corporate responsibility and compliance as laid out in our company's code of conduct. We have decided to pursue an integrated strategy to incorporate all material ESG aspects in our strategic priorities and at the end of the day in our day-to-day activities. Late last year, in the last quarter of last year, with the help of an agency, we did conduct a materiality assessment in a very rigorous process, out of which came 12 material topics as listed here, clustered around the headings of sustainability partner, employer of choice and business excellence. All these topics will be managed as integral part of our strategy, and we do believe that the integration of these topics is the most effective way to continuously improve and to meet both business needs as well as stakeholder expectations. Going forward, in 2022 and beyond, we will start with 3 topics. I do think that it's also important to stay focused and deliver on our priorities, and we'll pick green chemistry, people development and supply chain engagement for which specific strategies and targets will be developed this year. We will also need to conduct a CO2 footprint using the greenhouse gas protocol as a standard, just to understand our baseline today and to understand opportunities to further improve and reduce our CO2 footprint. Finally, we will also broaden certain certification programs, which I believe can be helped to improve our standards and processes. We will always seek to continuously improve on all these dimensions through a pragmatic, though effective and integrated approach. With this, I would like to conclude the strategic outlook and let me finish the presentation by providing our financial outlook here on Page 23. While the recent dramatic changes in the overall political environment in Ukraine and in Europe can, of course, not be ignored, they are not expected to have a direct, and I insist on direct, material impact on PolyPeptide, given our limited exposure to the region. We do sincerely hope that solutions will be found to restore peace as soon as possible. In terms of midterm guidance on the left side, given the structure and dynamics of the market today and given our aspiration to our grow to market, we are staying consistent with our previous guidance and the group continues to expect revenues growth in the low teens with an adjusted EBITDA in the range of 30%. For 2022, on the right side, PolyPeptide targets revenue growth of 12% to 14% versus 2021 with a targeted adjusted EBITDA margin of around 30%, again, consistent with the guidance we had provided last year. However, we will continue to invest in modernizing and expanding our infrastructure, and our capital expenditures as a percent of '22 revenues are expected to be above 25% as we continue to see good returns in investing our own cash into our own infrastructure expansion. With that, I would like to conclude the presentation. Thank you very much for your attention for people here in the room as well as people online, and we will now open the floor for questions. Thank you very much.

So let's start with the questions in the room, if there are any. Maybe introduce you briefly.

Daniel Jelovcan from Mirabaud. Maybe for the first of 3 questions. In generic peptides, as far as I have in mind, you aren't that exposed yet in contrast to your other Swiss competitor. As you mentioned, that's an area which you want to push. Do you push that with entrants in existing generic peptides? Or is your goal primarily to get the original drug which you manufacture already when it went -- when it goes off patent that you take this? So you're pushing existing cost? I think you know what I...

Yes. No, it's a good question. Should I answer this one? It's a little bit of both, as always. I do think that we do have a portfolio of generic APIs today and part of the expansion today is to take the existing products. And as Jan said, we are finding a lot of DMFs, and you have to do this across the world. And so one access is to expand our geographical reach of our existing generics API. And there is -- we do see significant opportunities, for example, in emerging markets. And I can say that we have filed a lot of DMFs across the world in emerging markets as well. So that is one access of growth. But the other is your second question, which is that we are focusing now on starting to develop new generics APIs. So that's a rather long-term view. You probably know you have to start early, developing generics API. This could be APIs that we don't do ourselves. It could also be APIs that we do for the originator provided we would be allowed to do so. That is then decided on a case per case basis.

And the second question, when you mentioned that the volumes have doubled and sales were up 26%, of course, there is -- and your gross margin was extremely strong, so that doesn't look like you had a bad mix, but still the difference to the volume growth and the value growth, can you explain a bit on that?

No, it is purely a product mix impact. I think you have to -- if you look and then -- I'll let Jan comment after that. Our products are very different. Even as API or advanced to medias are very different levels of pricing per kilo. So it is purely a product mix that will explain why despite doubling volume, the revenues increased by 26.5%.

Yes. Absolutely. So it is really -- it's a good question, but it's a product mix. So -- of course, our gross profit margin, as you also mentioned, increased by 3.8 percentage points compared to the year before. So it's really a question of some of our products. They have -- there's quite a difference in terms of the price per gram, and that is what is causing this.

And the last question. Thanks for providing the semesters in the OpEx, very helpful. And I guess your second half was a bit weaker in terms of momentum compared to second half 2020 because second half 2020 was extraordinarily strong because of COVID or how can we read that?

Yes, I can definitely comment on that. I think that's absolutely correct, as you mentioned there, as we also pointed out at our first half result. So the 2020, if we divide it into first and second half, the first half of 2020 was impacted by COVID and it was impacted also as some of the deliverables that were moved to the second half of 2020. So exactly as you point out, the second half of 2020 was abnormal strong and the first half of 2020 was unusual slow, if you like. So you really have to look at this at a full year basis.

So there are no more questions in the room. I suggest we now move to questions over the telephone.

The first question from the phone comes from Patrick Wood from Bank of America.

I'll keep it to 2, just for now, if I can. I guess the first one, you touched on this in the first half results about the incremental investment on the CapEx side. And I think you kind of hinted at it in regards to reviewing the midterm targets, let's say. I guess the question is CapEx and sales running, obviously, in 2020 was high, very high in '21 and still very strong in '22, as you rightly point out because of the strong pipeline that you've got coming up. How would you, if you were us, think about the kind of growth profile of the business when CapEx to sales is running at such a high level? It kind of implies that probably growth is a little bit higher in your estimation midterm than that low teens number. I appreciate you're not ready to really give any estimates on that side, but I'm just curious how you would square that CapEx spend versus growth for us? That's the first question. And then I guess the second question is somewhat related, which is we know for some other business models more so in like monoclonal antibodies and necessarily peptides, but obviously, incremental CapEx comes with OpEx. Historically, one of your peers have commented sort of for every $1 of CapEx, you end up with $0.10 to $0.15 of OpEx in year 1. Is that part of the -- is that true for you guys, too? And is that part of the reason that, in theory, a guidance of 30% EBITDA margins in '22 means your margins are coming back a little bit despite the stronger top line? Is it the OpEx with all that extra CapEx?

Thanks, Patrick. I'll get started. I hope you're doing well, and then Jan will comment. I think -- no, it's a fair question on the CapEx side. And as you said, I think we have said at the IPO, if you remember, that we are running at a fairly high level of utilization, and that was already the case in '19 and 2020. And so you see the CapEx partly responds to us already operating at a high level of utilization, added to that the pipeline that it's developing at this point of time. So this year, 2021 and 2022 do have a fairly high level of CapEx because of these 2 reasons. Now as you probably can understand, this CapEx program are actually fairly long-term plans. They are not a 1 year off and then off you go. Some of these projects are multiyear project that we started last year and will take a couple of years before they are fully operational and fully -- commercially and fully utilized. So it will take us a few years to get to that level. Hence, why at this point of time, we're still keeping our guidance as initially announced. In terms of the incremental CapEx, I think I will let Jan answer on the OpEx. But I'm not sure that, that would be whole true for 2022. I think we've always said that we were looking towards an EBITDA margin of 30%. It's more than -- 2020 was a little bit exceptional because of a product mix impact as we have announced last year, which is still the case. Jan?

Yes. So I can -- thanks, Patrick. So I can comment a little bit on the OpEx. So of course, what we have built in into our 2022 guidance and what we have included also as we have mentioned previously in our midterm guidance of remaining around 30% EBITDA is, of course, the progression of the business. We acknowledge also there is an element which we have also highlighted today of the product mix. So that is also important to acknowledge. And then what we also have, to an extent, incorporate is, to the best of our knowledge, the understanding of the current state of the supply chain. So how is that impacting our cost base in terms of the raw materials and also the labor cost.

The next question comes from James Quigley from Morgan Stanley.

I've got a couple. So first on CapEx. You mentioned your confidence given the number of projects that are coming through in the Custom Projects business. But with respect to the CapEx, could you give us sort of a split between how much is going to be focused on peptides versus oligonucleotide capacity expansions? And then of the CapEx that you're investing in, roughly how much is already backed by contracts versus speculative CapEx or more speculative CapEx based on what you can see in your pipeline? And then in terms of your late-stage opportunities that you highlighted at the time of the IPO, so how are they tracking? I think all but drug C were expected to be approved or filed by now. It looks like drug B was KORSUVA and drug E, I think, most believe is Tirzepatide. But what impact could these assets have on the 2022 revenue outlook? And particularly thinking about the first half, second half split as some of these drugs might be ramping up in terms of production? And then maybe just a quick third one. In terms of Novavax revenue, what are you expecting in the guidance in terms of 2022 over 2021?

Yes. Thanks, James. I can start with the first one. So in terms of the CapEx, so I will try to go through the 3 elements of that question. So in terms of the peptide and the oligo, the split of that, the majority, of course, is related to our peptide, but we are, clearly, as we also mentioned, very committed, and we are expanding our capabilities in the oligonucleotide aspect. The second part of that in terms of what -- how you would slice and dice the growth or capacity increase compared to the maintenance. As we have previously also indicated, there is a -- which is also supported by our late phase pipeline, a clear focus on the growth. So it's difficult to exactly estimate what it will be, but somewhere around 80-20 is probably not far off. And then your last part of CapEx, how much is supported by our customers? I think it's -- a good indication of that is what I mentioned in terms of the over 37% increase in our contract liabilities or advanced payments from customers between '20 and '21. This is truly additional commitment coming from our customers, and these are customers where they have projects in late phase and therefore, also supporting our CapEx investments.

Maybe I can answer the second set of questions, James, on the drugs. I think let me answer the last one on Novavax, what we can say that in 2022, it is expected that the overall level of Novavax will be the same as in 2021. So that's roughly our expectation at this point of time. In terms of the various drugs that are in advanced stage, as you know, James, we do have 30 projects in Phase III. There are a few that are -- have either just been filed or in the process of being filed. Obviously, we do not control the approval and the launch time of these drugs, but it is our expectation that a few will -- should come to market, if not in 2022 then in 2023.

So in the meantime, we have also received a few questions through the chat function. The first question is from [indiscernible]. It's a question that consists of 2 elements. I think the first element we already discussed, but the second element is new. I read the question. Could you elaborate about the time frame of the Phase III projects, especially drug E? When are they expected to switch into contract manufacturing? That's the first part. And then the second part is the decline in contract manufacturing sales explained by a particular product patent cliff?

So for the time frame, I think I will respond the same that I responded to James. There are among our various Phase III projects. This really span the whole time frame of typically what we define as Phase III, which means some are obviously in early Phase III clinical trial. So we're still supplying Phase III quantities and Phase III trials ongoing, that can still take a few years, typically. Some are in what we call PPQ, which is a validation phase where you validate the process at commercial scale, and this is, obviously, significant work as part of preparation for a filing. Some are in filing preparation. Some have been filed and under review. So it does span the whole range. We think that a few and hopefully, again, it's not under our control, that we do expect a few to get approved in the next couple of years. In terms of the declining, I don't think that it is due to one specific product of patent cliff, but I think all of you know that part of our commercial portfolio -- as part of that, there are a series -- there are a set of products that are fairly mature today and, therefore, we do see some impact of a maturing portfolio overall in the market.

And then maybe just to support or add to that also, so definitely, as Raymond said, this is not specific to one product that has been genericized. There's also an element to understand, as I briefly explained earlier also in terms of the phasing. So we see, of course, the phasing of some of these products from the customers where they are building stock in a certain market due to different reasons. And of course, we are supplying the API to these customers based on their decision on when they want the product. So that also creates an element of volatility for this.

Another question through the chat function is from Miriam Kappeler from Finanz und Wirtschaft. How do you expect the production for Novavax to continue in 2022? And in which revenue segment will it be reported?

So for 2022, as previously mentioned, we are expecting a similar revenue for Novavax compared to what we had in 2021. In terms of the segment, so the way we define it is it will move from our Custom Projects business segment to our Contract Manufacturing business segment to our commercially approved peptides upon availability -- commercial availability in a number of key markets.

These are all questions in the chat function. Are there more questions over the phone?

Yes, sir, we have a follow-up question from Mr. Patrick Wood from Bank of America.

I'll keep it 2 quick ones. One is on the biotech funding environment, which has kind of shifted a little bit in the back end of last year and the start of this year. And I'm just curious, it seems like from the pipeline, things are good. But how have you guys found your conversations with your customers, more particularly the smaller biotech companies looking? How those kind of conversations gone in terms of their health? That's the first question. And then second one, just curious, any change in the underlying competitive environment? I mean, I know some of your larger competitors -- well, not larger for peptides, but Corden is, obviously, spending some time on the drug product side with Vifor and maybe they distract there and WuXi has its own challenges, but you've also got some private providers looking to move and be a little bit more commercial within the peptide space. I'm just curious, not necessarily commenting on any one individually, but have you seen any change in the competitive environment or the same?

Thanks, Patrick. I'll take that. I think biotech funding, what I can't comment, Patrick, is any reaction as for the last 2 or 3 weeks that I will not be able to do. And obviously, landscape has drastically changed over the past few weeks. But certainly, in 2021 and until the end of 2021, it was still a very positive outlook, and we saw increasing design, increasing activities in the world of peptides. As per the beginning of this year so far, I can't say that we have seen a lot of changes yet. But obviously, we all know the situation and be largely freeze of new IPOs and so on. How will this affect, I can't comment at this point of time. It's very, very hard to say. But I remain hopeful that just because of the need for these drugs that the funding will continue to do, and you still see some successful round A, B, Cs still happening today. So we'll remain hopeful for the years to come. In terms of the competitive environment, you're right, there are a lot of activities right now, but I can't say that we're seeing significant changes out there compared to what we saw last year. For us, we remain focused on our segments. We keep making sure that we stay competitive and win as many new proposals as we can, which is our goal right now, and we'll continue to do so. But I can't say that we see significant changes. And the only thing that I would say, I think, Patrick, which you know as well, some of the others are taking a more diversification approach to the CDA more and trying to build under one umbrella, multiple services across API, finished products, fill finish, multiple modalities. That's a choice they're making. We want to remain focused.

We have a follow-up question from James Quigley from Morgan Stanley.

Just 2 reasonably quick ones. So in terms of the number of projects, your custom manufacturing, you've said this has increased to 196. Can you let us know where this has moved for Content Manufacturing and Generics and or just an update there? And then on the gross margin, you've been fairly clear that mix is a big impact for next year as well. So I think the incremental gross margin based on what you've shown from Slide 10, I think it was, it was around 52%. So where would that be sort of under normalized circumstances? And then also, you mentioned that the different products have different cost per gram. If you could give us a bit more color on which products are higher cost versus the lower cost ones, that would be great.

All right. So I can start, James. So thanks. So the first one, just to be clear on the number of new projects. So we mentioned that we have increased the number of new projects in our pipeline, up to 196 by the end of last year. What we mentioned around the IPO was 181 projects. So we have increased it. And this -- just to be clear, so these are projects in our pipeline. These are projects in our Custom Projects business segment. So from preclinical all the way up to Phase III with the majority of these additional projects in Phase I and Phase II. And these are split between big pharma and also some biotechs. So the second part, in terms of the gross profit margin, so you're right, that is increasing from the '20 to '21 with 3.8 percentage points. And of course, this is clearly a function of these different elements I mentioned. So one, the product mix. The second one, the economies of scale and the capacity utilization. It's difficult to say under normal circumstances because the way we view it is that we incorporate the different projects into our business. We have our investment in our capabilities also included. So we see this as part of the ongoing business. And in terms of the actual margins per product by customer, we don't disclose that specifically. But what we mentioned is that we had a positive product mix in 2021 compared to 2020, which is also impacting our margins in a positive way.

There is 1 -- or 2 more questions over the chat from Yen Chu from AR Capital. The first question is what are the levers for PolyPeptide to deliver growth towards the upper end of the revenue guidance? Is it primarily driven by recovery in generics project or better progress in terms of time line from the Phase III projects? And the second question, could you comment on the supply chain disruption, if any?

So let me take the first one and then Jan will answer the supply chain. I think for the first one, it's more the latter. This is a business where we're very dependent on customers' orders. And we have always said at the time of IPO, we tend to have a high level of transparency going forward, a high level of visibility, I should say, with confirmed purchase orders. But nevertheless, sometimes things shift. We want to be flexible. Customers may ask to prepone or postpone some of these purchase orders, which may therefore have an influence on our growth profile. So usually, the upper range will be if we stick to our confirmed POs, but this will largely be around products that are in Phase II and in Phase III. That's where the driver will be to explain the ranges there. In terms of supply chain, maybe we'll let Jan comment. It's a good question given today's circumstances.

Yes, absolutely. It's a very, very good question. So maybe just to give you a little bit of additional insight to understand the impact or the magnitude of the impact. So our cost structure, you probably -- if you look at the P&L, you will see our cost structure consisting of [ EUR 222 million ] in terms of cost. That cost base -- over 50% of that cost base is consisting of labor costs and raw material costs, where labor cost is the most significant part. So the direct impact where we see right now, the energy prices, they are increasing. The direct impact, we don't see anything material there. Our cost base related to energy is immaterial. So 3% or so of our total cost base. So in that respect, we don't see any material impact. Where there could be or what we see also an indirect impact on some of the raw materials where they are impacted by the changes in oil and gas prices and so forth. So that we have, to some extent, incorporated into our target. And what we are also doing is we are incorporating that into our pricing to our customers. So we will try to pass that on to the customers also going forward.

There is another follow-up in the chat from [indiscernible]. A quick follow-up on Novavax. The vaccine was approved in late 2021. Why don't you expect revenue rise from Novavax on 2022? During half year results, you were expected -- or you expected volume rise for the next year, if I'm right.

I'm not sure I fully understand your question, but let me respond a way, I think. I think, yes, you're right, the product started to get the first emergency use approval at the end of last year and obviously, continued in the beginning of this year. But you have to acknowledge that even in 2021, most of our production was already large quantities. So this was most -- as typically a pharmaceutical, and especially in this case of critical vaccine, most of the production done by us as well as Novavax in '21 was already to make sure that there was enough launch quantities for all the launches that they were planning starting in the end of this year and early this year. And this is why we reiterate what we said that 2022 is expected to be at a similar level as 2021. I hope that answers the question.

I don't see any more questions in the chat. Are there more questions over the phone?

Gentlemen, so far there are no more questions over the phone.

Okay, then. Thank you very much for all the people on the web, for all the people on the phone and obviously, all the people sitting here in the conference room. Thank you very much for attending our presentation. If you do have any further questions, any other comments, please reach out to Michael, our Head of Investor Relations, Corporate Communication. We'll be more than happy to answer any question or set up any ad hoc meeting as required. Thank you very much for your time. We appreciate you being here today.