PolyPeptide Group AG (PPGN) Earnings Call Transcript & Summary

Good morning, everybody. Thank you for joining our earnings call. Great to have you on the line. I'm joined here by Raymond De Vre, our CEO; and Jan Fuhr Miller, our CFO. Then we walk you through the presentation, and at the end, I will answer your questions. I draw your attention to our usual disclaimer on Slide 2. For the Q&A session, you're going to have the opportunity to ask your questions over the phone or through the chat function in writing. And with the short introduction, I hand over to Raymond, please.

Good morning. Jan, Michael and I are sitting here in office in and we're looking forward to be presenting to you today. I'm Raymond, and would like to personally welcome you all to today's call. As you all know, we had already provided an update of our material H1 development back on July 12. And in news, we announced was clearly a disappointment to us and for the market. We also realized that there were some unanswered questions, and we have thus provided additional disclosures and information today. I hope that in today's call, we will be able to explain development in our forward-looking expectations. We will also obviously continue to reach out to you and remain available for further discussion at any time, including as part of our upcoming investor roadshows and conferences. Importantly, we do really believe that our long-term story is intact also in this more challenging environment. And we do continue to be convinced about the strength of our business going forward. So let me start with a summary of the performance on Page #5. In the first half of '22, we had revenues of around EUR 134 million, down 1.1% versus what was a strong H1 2021. We had a larger-than-expected drop in adjusted EBITDA, leading to an adjusted margin of 20%. We will explain in detail later. Jan will go through the bridge in detail, but the drop can be explained by two major factors. First, the impact of an increased personnel cost base over the past 12 months needed to support our planned growth. Then also the impact of a more demanding operating environment as we have said, especially around inflationary pressures. We had capital expenditures of around 38 million or 28% of revenue. This reflects a continuation of our expansion strategy that started a couple of years ago to support our pipeline. We do have an active Custom Projects pipeline of 218 projects now, growing from 180 a year ago, reflecting what we believe is a continuous industry belief in peptides and nucleotide-based therapies. In the course of the past few weeks, we've also realized that it is important that we provide a bit more insight into the mix of our business. Hence, we wanted to share that the revenue associated with the coronavirus pandemic were around EUR 33 million in the first half of this year and around EUR 63 million for the full year in 2021. As we have already mentioned earlier in July, we have reached an agreement to shift a portion of our pandemic-related business that was already on order for the second half of this year into 2023. Given the shift that I had just mentioned and given continued inflationary pressure, we are expecting revenue growth of 8% to 10% with an adjusted full year EBITDA margin of 22% to 25% for 2022, which still implies a healthy growth from our peptide business. To deliver on our aspiration, we have already taken actions and launched various initiatives to ensure strong and lean execution in the next few months. For the midterm now, we do expect the business to grow with a revenue CAGR in the low teens, so with varying growth rates year-over-year. We also expect a continuous progression of the adjusted EBITDA margin back towards 30%. This would be a summary. I will now let Jan provide you a lot more details and any insight on our financial results for 2021. Jan?

Thank you very much, Raymond, and good morning to everyone. I'm pleased to go through the financial results for the first half of 2022. So let's start here by taking a deeper look into our financial performance, starting here on Slide #7, as you see. This slide provides the reported half year development of our total revenue and EBITDA from 2018 all the way up to 2022. As you see, we reached revenue of 133.7 million for H1 '22 highlighted here on the left side of the slide. The slight revenue decline of 1.1% or the 3.3 percentage decline at constant currency compared to a high base of 2021. The lower-than-expected revenue was driven by a more challenging operating environment than we anticipated at the beginning of this year, resulting in several of our customer deliverables shifting to late in the first half and some deliverables also being moved to the second half of this year. To the right, you will find the half year development of our reported EBITDA, providing us with EUR 26.7 million for '22. So for the first half this year, we unfortunately faced -- we are faced with a more significant drop in our EBITDA than we anticipated, certainly amplified by the current inflationary challenges that we see. Again, this compares to a very high, very strong EBITDA for the first half of '21 as you see from the graph. The first half of '22 EBITDA was also impacted by the increase in our personnel during the second half of last year and the first half of '22 ahead of our anticipated growth. I will also -- as Raymond mentioned, I will be providing some additional details on the key drivers behind the year-on-year EBITDA drop just in a few slides. So on the next slide, being Slide #8, we present the development of our business areas from 2021, as you see to 2022. Again, our strategy is to continuously grow our pipeline, facilitating future growth of our commercially approved peptides or our contract manufacturing business area. So I would like first to draw your attention here to development of our Custom Projects business area earmarked in light green, providing H1 2022 revenue of EUR 72.6 million. During the first half of this year, two of our CP or Custom Projects project from our pipeline were commercial launched in the market, shifting revenue from our Custom Projects business area to our Contract Manufacturing business areas. So this resulted in, as you see, a 5.8% increase of revenue equal to EUR 48.4 million for our commercially-approved projects sold to the innovator. Thus, the two commercially approved products more than offset the impact of our somewhat maturing Contract Manufacturing portfolio. On the Generics & Cosmetics business area seen here to the right on the chart, slightly declined in the first half of '22 with 3.9% compared to the first half of '21. Here, it's driven by two factors. So the first factor is during the first half of last year, we did experience some stock building from a number of our customers. This is combined with some H1-H2 phasing of sales in 2022. So the next slide shows the key drivers explaining the drop in our adjusted EBITDA from H1 '21 to H1 '22. And as you see here, this is Slide #9. So our adjusted EBITDA of EUR 43.2 million in '21, as you see all the way to the left, dropped to an adjusted EBITDA of 26.7 million in '22, equal to a margin of 20%. This significant drop in profitability in H1, partly unanticipated, is driven by several factors. So first and foremost, our average FTE base grew by 130 employees from the first half of 2021 to the first half of 2022. This is equal to an increase of 12.7%, an increase mainly within operations and quality that is linked to our business growth ahead of us. As you can see from the graph, the FTE increase had a negative EBITDA impact of EUR 13.3 million compared to the first half of last year. So to the right of the FTE increase, you see the impact related to input costs equal to an amount of EUR 8 million between the first half of last year to the first half of this year. So let me specify what is actually included in the category input cost. During the first half of this year, we were impacted more than expected of a number of factors included in this category. Starting with the price increases of our raw materials used in our production, we were experiencing substantially higher solvent prices amplified by the current macroeconomic environment. On the same note, our energy, consumables, waste and inbound freight costs have gone up. And finally, we are exposed to wage inflation at several of our operating facilities. Again, some of these factors accumulated account for a total negative impact of EUR 8 million, of which around half was unanticipated. Moving further to the right of the graph, maintenance of our sites and equipment is important for our smooth operational execution in development, analytical and production, resulting here in an increase of EUR 2.7 million compared to EUR 81 million 2021, of which 50% to 60% was unexpected. To the right of maintenance, we have other. Other is composed of additional travel, as an example, marketing, insurance as but also some scrap from operations. In this case, we experienced additional unanticipated insurance costs due to the current macroeconomic environment. During the first half of this year, we had a positive net impact on the EBITDA of our product mix. So the product mix impact was equal to a positive EUR 2.1 million of projects that we finalized and delivered to our customers from January to June 2022 compared to last year. And finally, we worked on a substantial number of additional projects across our three business areas for delivery to the customers during the second half of this year. So this favorable impact of change in cost absorption on the EBITDA accounted as you see here for EUR 8.4 million. So again, this leads us back to our EBITDA of EUR 26.7 million equal to a margin of 20%. On the following slide, being Slide #10, I'd like to share how we have worked with our pricing model to cope with inflationary challenges. So to further understand the inflationary impact on the key elements of our cost base, we have included here an illustration of our cost structure, as you see on this graph here to the left. As a reminder, over 70% of our cost base consists of costs associated with energy input costs -- sorry, input material and our employees. Again, the year-on-year impact of the EUR 8 million addressed on the previous slide is a combination of raising energy costs at our facilities, higher-than-anticipated raw materials and especially solvent cost being utilized for the production of our batches and the automatic wage indexation taking place mainly in Belgium, increasing our personnel cost. A substantial part of that an unanticipated cost, we have not been able to pass on to our customers due to first, we had a large share of firm purchase orders leading into 2022, combined with the limited flexibility for some of our contractual terms. During the first half of this year, we have enhanced the flexibility of our contractual terms and aligned our pricing model accordingly to be able to better cope with the inflationary conditions we see. So for all new customer purchase orders the increase in the input cost base that I spoke about due to the factors, the various factors have already been implemented. For our existing purchase orders, of which some are also to be executed in 2023, we continue the discussion on inflationary adjustments with our key customers. We anticipate that the full benefit of our pricing and contractual improvement initiatives will be in full effect in 2023. On Slide #11, we have provided a summary P&L here, presenting the development from the first half of '18 to the first half of 2022. So as noted here, our 2022 operating results reached EUR 15.5 million and a margin of 11.6% of the revenue, below 2021 due to the factors or drivers that I mentioned earlier. The increase in our financial expenses in the first half of this year compared to H1 '21 are driven mainly by the exchange rates, but also a few leasing contract The effective tax rate for the first half of '22 ended slightly above 20% compared to an effective tax rate of 16.6% in '21, where the H1 '22 tax rate is in-line with the full 2021 effective tax rate. Our result of the year, the first half of this year came in at EUR 10.2 million, equal to a margin of 7.7% and equates to an earnings per share of 0.31. So now let's move on to the development in our cash flow and cash position, which you will see on Slide #12. So as I mentioned earlier, we are focused on growth for the future. This is also reflected in our cash flow statement. For the first half of '22, growth coming from our net cash flow from our operating activities, excluding a change in net working capital that amounted to, as you see, EUR 17 million. This is indicated here on the -- with the light green bar on the graph. This is offset by our change in net working capital of minus 24.7 as well as the cash that we have used for our investment activities, which is the amount you see of EUR 41.2 million. Summing that up, it accounts for free cash flow equal to minus EUR 48.9 million between December 2021 and end of June 2022. The outflow change in our net working capital of the minus EUR 24.7 million is a function of mainly three factors. So number one, our inventory increased close to 25% since the end of '21. This is due to the growing business anticipated in the second half of this year. And again, this equates to an increase of over EUR 27 million of the inventory. The second factor, a decrease in our contract liabilities or our advanced payments from our customers equal to EUR 12.8 million compared to the end of '21, reflecting the execution of our customer commitments secured going forward, especially related to some of our late-phase projects. And finally, this time moving in the opposite direction, a decrease in our trade receivable balance of close to EUR 19 million compared to the balance of December '21, noting also that December 2021 was an all-time high sales month for peptide. During the course of January to June '22, we also purchased treasury shares with the amount of EUR 12 million. This is in the context of share-based programs. And as you know, we issued a dividend to our shareholders of EUR 9.7 million following the AGM. So this finally provides us with an end of June 2022 cash balance of EUR 66.4 million. Our focus on executing investment initiatives to support the growth going forward is shown on the following slide, and this is Slide #13 here. So we have, as seen here, generated CapEx of EUR 37.9 million, equal to 28.4% of revenue in the first half of '22 equal to investments in our PPE, but also into intangibles that has been capitalized during this reporting period. This is equal again to an increase of around EUR 13 million compared to the first half of '21. During '22, we continue our capacity expansion program while we also added new capabilities to our facilities and further strengthened the digitization and automation in line with our strategic plan. Just a few key projects to highlight that I have mentioned earlier, the expansion of our large-scale solid-phase synthesis capabilities and capacity in Belgium and our downstream capabilities in Sweden in Malmö. We're also in the process of installing several additional life license across all our larger sites. So all key projects they are on track to support our planned business growth for the future. So now I am pleased to hand back to Raymond who will provide you with some conclusive remarks and our outlook. Thank you.

Thank you, Jan. Despite some of the financial results, we are pleased also by the future outlook also, and I wanted to share a few highlights for us -- for all of you going forward. Here on Page 15, you get an overview of our pipeline. What has been interesting is that over the past few months, given the lifting about traveling restrictions, we have had the opportunity to interact with on with many customers around the world. And we do continue to see biotech companies and pharmaceutical companies investing into peptide and nucleotide-based R&D. Hence, we continue to strongly believe that the business of peptide and nucleotides remains a significant growth driver for the future. So our focus remains to grow by expanding our pipeline, trying to serve as many customers as possible. PolyPeptide aims to be the preferred partner for its customers building on strong API capabilities. In the first half of '22, PolyPeptide made further progress in growing its Custom Projects pipeline, as you can see here. And we are really proud to report that we had a total of 218 projects at the end of 2022 compared to 181 a year ago and 196 at the end of 2021. Also, our pipeline obviously evolves continuously. But despite those movements, the number of projects in Phase III of clinical development has remained constant at 30 projects, which is exciting. In fact, two Phase II projects moved to Phase III. We and two former Phase III projects were commercially launched during the reporting period, as Jan mentioned earlier today. Newly acquired projects are typically in early-stage development and included several oligonucleotide projects. Around half the number of development projects are in two exciting therapeutic areas. One is metabolic disorders, which includes diabetes and obesity, and the other one being oncology. Given the expected dynamics from its pipeline, PolyPeptide is preparing for a significant growth of manufacturing volumes going forward that is projected to outpace actual revenue growth. I thought I would illustrate that with a couple of examples and pictures in the next few slides. So let me elaborate on our expansion plan and why we are -- what we are doing in order to support our pipeline. Jan mentioned some of the programs that we have in place. And I do want to reiterate what he said that overall, despite what does remain a difficult global supply chain environment in general, we are glad that today all our major expansion projects are still largely progressing as the brand across all our sites. Here Page 6 you see what is actually our largest infrastructure program right now, which is a large-scale solid phase synthesis unit in Braine in Belgium. In fact, I was there earlier this week, and I have to say that it is a very impressive infrastructure. The unit having been designed with multiple pieces of equipment across multiple floors to be able to handle different types of products. It would also be automated to minimize risk and optimize efficiency. All the most critical large process equipment have been delivered and the unit is expected to be fully in operation in 2024. I would like to add that more generally speaking, this site in Braine is the site that has the most significant expansion potential in the medium to long term, even beyond the current infrastructure. On Page 17, here, a couple of other examples. On the left side, you can see the new large-scale purification and lyo line in Malmö, which is significantly improving the downstream capabilities that decide. We'd like to share that we have installed, and you may remember, us saying there's a similar piece of equipment in last year. And that later this year, another one, lyo will also become operational in Torrance, California. And we have worked very closely across all the sites to optimize and standardize design and installation of all three lyos to make sure that we capture synergies across the group and facilitate internet that transfers when and if appropriate. On the right side, as we have said multiple times, our growth ambition includes the expansion of our capabilities beyond peptides into the market of nucleate acid-based therapies otherwise known as oligonucleotides, which we all know is a promising new modality with hundreds of compounds in development today. I'm very happy that our R&D and GMP pilot plant facility as well as the team in Torrance are fully up and running right now. And as I mentioned, with several active development projects ongoing in the facility as we speak. As a reminder, our group strategy is to build a portfolio of early-stage oligonucleotide Custom Projects and to develop the business and infrastructure with a long-term perspective step-by-step. On the next page, I wanted to summarize a little bit where we stand on our integrated strategy. I did introduce this framework earlier this year, and would like to provide a brief update along some of the dimensions. Of course, customers first, goes without saying the customers at the center of everything that we do. On the bright side going for growth, growing is key to support our customers, and as I've stated before, peptides do remain a vector for future growth. As I illustrated with the previous photographs, we are investing in our infrastructure, but also in our analytical and digital capabilities to better serve our customers and meet their future needs. Upcoming patent expiries are giving us opportunities to expand our portfolio of generic APIs and with the emerging oligonucleotide-based APIs, the group also aims to meet unmet needs for customers in that area. On innovation, the value that we bring to customers is closely linked to our leading-edge capabilities in providing product and services effectively, efficiently and responsibly. To that end, we are implementing an innovation agenda to ensure that both our upstream and downstream manufacturing process and analytical capabilities stay at the forefront of technology. As an example, we have recently filed a patent around an innovative approach to solid phase indices to improve throughput. We're also structuring our innovation team in Strasbourg to be closer to the innovation ecosystem in the whole region. An important dimension, as we have said multiple times, is a group-wide green chemistry program to reduce the environmental footprint of all our activities. We are scaling up novel approaches to reduce solvent consumption to most of our large-scale equipment. We are implementing a comprehensive program focused on the use of solvents aligned to the well known principle of green chemistry. This is a technically complex challenge. Hence, we are working with partners, including academic institutions, technology startups, industry associations and, of course, customers. Finally, OnePolyPeptide, as an overarching team, given what we're facing, given the growth that we have ahead of us, the group's strive to continuously upscale and upgrade its overall capabilities as OnePolyPeptide. This is critical for success. We seek to continuously reinforce our OnePolyPeptide culture but also to build solid global foundations that are required to achieve that growth is sustainable. As we mentioned earlier, we increased our net average FTE by 130 over the past 12 months. 90% of these are employees on the floor in operations, in development and in quality. This, by the way, means that the increase in new people is even higher because you also have some level of attrition, of course. So our purpose is really to ensure that we have the right programs, culture and processes to improve our capabilities and seamlessly absorb this high level of people every year, which is a significant increase compared to what we used to do in the past. Finally, a quick word but we will come back to this with the full year. We continue our ESG efforts we are implementing, as we have said before, an integrated strategy to incorporate our material ESG aspect of our business as part of our strategy, being around green, talent or supply chain management. I hope this provides an overview of where we stand today in some of our priorities going forward. Based on this, I would like to now share a little bit more information and discuss our financial guidance here on Page 19, starting with 2022. PolyPeptide undertook considerable efforts in 2020 and 2021 to support the global fight against the pandemic, which in that context was clearly the right thing to do. Now the nature of the coronavirus pandemic has changed, and as you read in our market update of July, an agreement was which to shift a portion of the coronavirus pandemic-related business, that was on order for the second half of '22, and we shifted that into 2023. Given the circumstances, we work closely together to come up with the best suitable solution for us and for our customers. For 2022, as shown on Page 19 here, PolyPeptide therefore now expects revenue growth of between 8% and 10%, which still implies a healthy growth from the peptide business. The adjusted EBITDA margin is expected to be between 22% and 25%, given also continued inflationary pressure as expected for the rest of the year. The level of capital expenditures as a percent of revenues remains unchanged at over 25% of revenue. To deliver on these aspirations, we have already taken many actions and launched various cost, productivity and pricing initiatives to ensure strong and lean execution in the next few months, which will obviously be critical. On Page 20, a few words now on the midterm outlook. PolyPeptide obviously recognizes that the nature of the pandemic is changing, but also that the overall macroeconomic environment has become more and more demanding. And that, combined with uncertain geopolitical developments. However, it has confidence in the structural growth opportunities in its market and more specifically in the potential of its lead to these customer projects as we have stated multiple times in the past. For the midterm, assuming no unexpected adverse events, PolyPeptide expects to grow its business with a revenue CAGR in the low teens, though with varying growth rates year-by-year. In particular, we expect slower growth for '23, followed by an acceleration of growth in 2024, driven by the typical uneven phasing that is quite common in this industry. PolyPeptide expects to continuously progress the adjusted EBITDA margin towards 30%, despite the margin of 20% in this first half of this year and the setback that we have all seen. When we look at the future, we are and remain convinced that structurally, this is a business with indeed a 30% margin at that scale. With that, I would like to thank you for your attention, and we will now open the floor for questions. Thank you.

The first question comes from the line of Daniel Buchta with ZKB.

Maybe two questions, if I may, one after another. Starting on your COVID-19 business, I mean, thank you very much for providing these details. It's very, very helpful. If I take your guidance adjustment for topline momentum this year. I mean I get roughly EUR 50 million sales for this year still. But then more importantly, on your midterm guidance, I mean, it's unchanged at low teens. You mentioned earlier a bit slow or slower in '23. But what are your assumptions in this midterm guidance regarding COVID-19 business? Will it go down to 0? Or I don't know, whatever amount of revenues you can still expect beyond 2023? And then also a question on your phasing for the margin midterm. I mean we will finish this year with 22%, 25% margin. But midterm, you still expect to move progress again towards the 30%. Maybe you can provide a little bit more color on how this progression may look like. And then last but not least, maybe a question on the pricing discussions. I mean, thank you very much also here for providing these insights. My understanding was always that CMOs, in general, is a cost-plus model. I mean, so therefore, I'm a bit surprised that you have so tough discussions also with customers where you have ongoing project. I mean, how is -- how are they responding that it may take until mid-2023 until you're fully done with passing on the significant inflation you're facing at the moment?

Thank you, Daniel. I will take the first question, and Jan will take the second and the third question. On the COV19 business, you're right, your estimates are about right for 2022. To be very clear, in our midterm guidance for 2023, we have obviously accounted for the portion that was shifted into 2023. So that's obviously accounted for in 2023. But that's the only date it's accounted for. For truly the midterm guidance beyond that, we are not assuming anything from a coronavirus expected revenues anymore. Given the nature of the pandemic, we are not assuming anything anymore.

All right. So thanks, Daniel. I will then start with your question on the progression of the margin. So as you mentioned 2022 to '25 is our guidance for 2022. And we are also confident in the midterm that we are progressing towards 30% margin, adjusted EBITDA margin. So as also mentioned earlier, we see as Raymond mentioned, an uneven uptick of that. And this is a reflection of one or couple of very important things. What we see is, of course, our late-stage pipeline, and we see the evolution and the expectations of that, how that is progressing for our top line, the assumed phasing of that revenue and therefore, also the utilization of our assets, our economies of scale that we expect to get on that phase as well. And that's why we see at the at the midterm, at that end, we see that progressing, and we're confident on that 30% EBITDA margin. So that's the one. The third question you had, Daniel, on the pricing. So I would highlight two factors here, which has -- and they are correlated that have caused the challenge that you also alluded to on passing on these inflationary challenges that we experienced, the macroeconomic environment and so forth. And you're right, Daniel, we have a cost model, clearly. What we had and what we have also mentioned previously, as you might recall, is we have a very significant amount of visibility of purchase orders or sales orders to our customers leading into a new year. And that we also -- that was also the case leading into 2022, where we had in the range of 65% to 70% of the purchase orders already in place, already set based on the contractual conditions and so forth that was managed mostly towards the second half of last year. So that gives us -- that it's very, very nice with that visibility, but it also created some limitations, limitations if you look at the way our contractual terms were defined to these customers, which gave us limited capabilities to do these adjustments. So that is what we -- as I mentioned, what we have really worked on in the first half of this year to ensure that, first of all, all the impacts that we see on the increased raw materials, increase in prices for solvents, energy costs, consumables, the wage inflation, that is reflected in our cost-plus model. Going forward, it's going to be included for all the quotes or it have been included for all the quotes that we passed on to the customers, the quotes that have been turned into POs now. But obviously, the ones that we have the current level of existing POs that is still being executed, and that will be executed in the second half of this year and also some in the first half of next year. That's where we still have the discussions with the customers on doing an adjustment on the pricing to reflect more of the inflationary challenges. Hope that answers your question?

Yes, it certainly helps.

The next question comes from the line of James Quigley with Morgan Stanley.

I've got a couple. So -- just on the midterm guidance. So if you've used the mid-teens guidance -- sorry, the low teens growth, I think you said 10% to 13% is what that translates to two. So we use the midpoint of out on a CAGR basis to 2025, using '21 as a base. And they're then sort of working backwards, excluding COVID, it's just around sort of 18%, 19% growth for the underlying business, the market is expected to grow about 10% range or so out 2025 based on the IPO document. So has there been an underlying acceleration in the market growth? Or what other factors would you point to that has PolyPeptide at almost double the market. Presumably, the revenue mix trends towards metabolic and oncology projects is key, but is there anything else I'm missing? And can you give us a sort of a sense of your confidence in that implied growth rate? Then secondly, within the Contract Manufacturing revenues, as you mentioned, there was growth of 5.8%. Can you sort of split out the contribution from the new products and the underlying business, especially in the context of a decline of 23% in the second half of last year. So what I'm trying to get at is the -- what is the rate of the underlying decline? And also, what are the reasons for that decline? It doesn't look like there's much offset coming through the generics business. So is it purely just lower demand for the underlying products in the portfolio? Or is the in-sourcing or what are the impacts or the factors that's impacting that part of business? And how should we think it should trend over time? And then just one quick one on cost pressures, again, sort of related to your cost-plus model. How are you sort of future proofing for inflation that's going forward? We've seen that inflation is still pretty high. So to what extent can you future-proof some of those contracts so that there is some element of upcoming inflation impact reflected as well?

Thanks, James, I'll take the first and third question, Jan will take the second one. So your assessment of the dynamic in the midterm outlook is correct. And indeed the low teens overall on the reported revenue, expected growth rate CAGR growth rate over the midterm does translate to a growth rate -- a higher growth rate, if I can use that, as you mentioned, for the underlying business. That is correct. And I think the reason that you mentioned are the reason and is part of what we've tried to communicate is where it is the portfolio. It is the portfolio that we have both the combination of the Phase III portfolio that remains stable in number, which means that actually as projects -- as a couple of projects get commercial products get added into it. It is the combination of the late stage, but also the broader pipeline and increasing overall to some extent as well. So these are the impact. And I think we remain confident, and in that sense, quite consistent with the fact that this pipeline is solid. We keep open dialogues with all our customers across those various products to make sure that we stay up to date with the latest estimates of what the product will do in the market if they are successful. And obviously, it doesn't mean all 30 of them will be successful, probably not, because of simple loss of statistics. But it is an encouraging one. As you mentioned, the fact that a significant number of these drugs are in oncology, are in metabolic disorders, are in obesity tend to further reinforce that thing. So that's the confidence that, that is there, and we also try to illustrate this by the CapEx or the CapEx that we do here is largely as a result of that and just being able to support the future needs.

All right. Jim, I will take question number two on the Contract Manufacturing revenue and a little bit of insight into the dynamics, the evolution and how we see that a little bit going forward as well. So just to recall a little bit, the baseline here, end of last year, we had a bit of a decline, which is -- was a reflection of two or a consequence of two drivers. One, as I also mentioned that we have a number of projects in there that we sell into the innovator that are mature. So we don't see -- we see it very stable. We don't see it growing a lot. There's also an element in there of some stock building from the past where we saw, in particular, one customer who launched in a new market, building quite a substantial amount of stock impacting their need for API batches for a while, and there was also some COVID-19 -- sorry, some Brexit start building back in 2020. What we see now for the first half year, we see a slight increase, close to 6% increase compared to the first half of last year. And here, the two new projects turning into products now that was commercially launched, they more than made up this trend of our mature pipeline. Which, of course, we're very happy about and it's very positive because we really want our late-phase pipeline clearly to turn into commercial products that we can sell to our innovator. So that is a positive one. What we also see going forward with that in mind, of course, for these products for the second half we expect also the Contract Manufacturing will grow. Of course, what Raymond mentioned also is that we still have 30 projects. So we moved to in the first half of this year from our custom projects, our pipeline building, business area to our contract manufacturing, our commercially-approved products to our innovator while we got two new projects from our Phase II to Phase III. So we still have 30 projects in there, in our late phase, in Phase III, which is very important also in our midterm for the growth. And of course, we see that as some of the growth drivers or the growth drivers for the top line and also, therefore, clearly for the adjusted EBITDA in the midterm.

On the third question on the contracts and the possibilities to adjust, you're right, I think we need to do a better job at this going forward. This is a bit of a lesson learned for us, and we're doing this through various things. Obviously, any new customers, new contracts, it goes without saying that we will adopt and make sure that we have the flexibility that we can. Secondly, for existing ongoing contracts, there we do have usually protection but we will make sure that, especially as we think of 2023 and have new purchase orders starting now, typically being discussed in the second half of 2022 for the following year, these -- the right cost structure is then being used and the adequate pricing as well. Then finally, the last way to do this, James, is that we also have, especially when we have products in late-stage Phase III, you have a natural shift there where you typically move from a development contract to a commercial supply agreement. So that's a typical change of contractual relationship that you have as a product really moves into commercial tends to happen being negotiated at that point of time. And that is also a point of time where you can make sure that the terms and the conditions are approved reflecting the current situation.

The next question comes from the line of Tanya Hansalik with Credit Suisse.

I had most of my questions answered, but maybe just two more to clarify. For -- the margin in 2022, I think it would be helpful if you could kind of help with the Novavax contribution, the higher margin than the base business and basically stripping out this effect. Could you give us a kind of a starting point for the margin going forward? Yes, I saw in 2020, you had around 20% EBITDA margin. Is it as low as this or better? And then in terms of the midterm profitability target, could you give us some color on the time line to reaching the 30% of the progression or 30% like -- when do you expect this to be reached again?

All right. I can take the two questions, Tanya. So on the first one, you mentioned about what is the profitability, if you like, of the COVID-related business there. So we don't specify exactly what it is clearly due to the confidentiality. But what I can mention and what you can consider is that this is above average in terms of that. And that obviously has now been built in to our considerations. It has also been built in, as we mentioned, there's some revenue that has moved as mentioned, to 2023. We are not considering in our midterm beyond that any COVID-related revenue, and therefore, any margin connected to that in the rest of the midterm. On the timeline to reach the 30% adjusted EBITDA margin, I would see the progression reaching that towards the end of the midterm. We have to -- it's very much connected to our late phase pipeline. As I mentioned earlier, it's very much related to the progression and expected approval and so forth of some of these products -- projects. So I would say we anticipate that we will reach, and we're confident we will reach 30% towards the end of the midterm. But again, just to be very clear here, we see this as a progression. We see it also as an uneven development, is very much linked to how the top line is developing. I hope that helps, Tanya.

Yes. I mean just to follow up midterm, do what years do you consider is that like 2025, 2026?

So good question. we expect 3 to 4 years.

3 to 4 years, okay. And then if I could just lit one more question for last year. The Novavax revenues. Thank you for providing that EUR 63 million. Just for purposes, it would also be helpful if you could tell us a bit the split between H1 and H2 last year?

Okay. Yes. So definitely, Tanya, that's not a problem. So just be clear, so we have EUR 63 million of COVID-related revenue. If you look at the split between 2021, H1 and H2, it is very much even across the two semesters. Close to 50% between H1 '21 and H2 '21.

The next question comes from the line of Konstantin Wiechert with Baader-Helvea.

Well. So maybe two questions from my side. One would be on the contract liabilities. I see there are EUR 34 million still on the balance sheet. Is that now all on old purchasing terms? Or is that partly also now with the price adjustments? And maybe the second question because I haven't fully understood it now. It's regarding the increased employee base. So your EUR 30.3 million from that. Is that an effect that was actually fully anticipated? Or is that, yes, let's say, temporarily weaker resource allocation? As I mean, you now had EUR 33 million revenues from COVID-related production in the first half. So that doesn't look like a slowdown in the first half. So was it maybe that you already expected the drug to be launched in the first half of this year? Or how can I get a closer understanding why there is such a big difference, especially when I talk to customers which say that they would never have such a huge increase in employees before launching new production. So that's kind of where the struggle to understand this huge increase now.

All right. Thank you. I can take the first question and Raymond will take the second one. So on the contract liabilities or what is equal to what is the advanced payments from our customers, which we have in our balance sheet. So you're right, at the end of last year. So the 31st of December '21, we had -- a little bit more than EUR 46 million, which was reduced to close to 34 million at the end of June this year. So -- and your question was whether this is based on the previous costing or whether this is including the adjusted cost price model of the inflation. So it is a combination of both, but mostly it is related to longer-term commitments that have done -- that has been finalized prior to that. So for the previous pricing, if you like. So again, just to be very clear on what this is. So this is the advanced payment that they provide us with based on the contracts going forward. Clearly for some of the customers, these are going down. They are more into a different setting now if they're commercially approved. It's a different setup. It's not so much lumpiness where you do an upfront payment and you have following that, then you have some payments when you execute on batches and so forth. But very short, the majority of the EUR 34 million that we have sitting there right now in our contract liabilities maybe in our advanced payments from customers, that is pre-inflationary adjustments.

On your second question in terms of the headcount increase, this was largely anticipated. So there was no unanticipated in there. And this is largely as per our plan. I think what is important to realize is that, that is truly a headcount over the last -- since a year ago. So in fact, when you look at that headcount increase of overall personnel increase, a significant part was already incurred in 2021 in the second half of 2021. And then the second part was obviously incurred in the first half of this year. And this increase is not due to one drug. We cannot relate this to one project, et cetera. That would not be the case. But this is clearly a reflection of the broader increase of activity level that we are seeing among the group. And as we had stated in the full year report, in 2021 even compared to 2020, our volume of production almost doubled. So you have to realize current production volume, across the board, across the pipeline, across the commercial product, more or less, doubled, which includes -- which means more activities, more testing, more shipment as well. And I think we continue to anticipate an increase in that going forward as well. And so we need to plan. And it's -- also in today's world, recruiting people is not so easy. It is not so straightforward. And so this needs to be planned in advance. You can't start recruiting people the day you need them. You need a certain anticipation. Training people for G&P activities is in itself a 3- to 6-month process. So this needs to be planned well in advance. We also see attrition. Attrition is increasing as everyone would witness in the world today. So you need to plan for attrition as well so that you always are sufficiently staffed in order to execute the plans that we have. So it's a combination of all these activities that explained why we had that increase. But again, as I started with, this was all planned for. There's no surprise on that basis.

Okay. And maybe one smaller last question regarding the oligonucleotide business. I think is it now correct that you first booked first revenues in the first half this year? And maybe you can you give a broad indication what you expect for the full year? And also I would be interested if you feel like giving us a broader understanding where you see the oligonucleotide business in, let's say, 3 or 4 years? I know there's still the decision, I think, outstanding if you want to go into the large-scale production or not, some color to that would be great.

That is correct. Oligonucleotide revenues had been booked as part of our revenues, as part of our first half. We expect that to continue to grow. We do have a few projects, as I mentioned, but we're not in a position here to disclose any range of numbers right now. I think it is a priority for us. In terms of capacity increase, we do plan to increase our capacity. But as you said, we're not yet ready to put full low large-scale capacity that would be premature. But we still have room even in our current facility where we have the installed equipment right now, we can still increase the capacity in that in a significant way by adding equipment to try to match supply and demand as well as we can going forward.

The next question comes from the line of [indiscernible] with [indiscernible].

I have two questions actually. One is on price increases. So you said that with the new plans, you try to increase the prices in the new contract. But how long does it actually take for you -- to price increases to show an effect on your numbers? And secondly, so you said at some point that you expect the peptide market to grow at some 7% annually. Is that still valid? And finally, do you have any issues with currency effects at all? .

All right. So I can start on the first question, just to be very clear on how that works. So in our cost-plus model, what we do -- when we do accrue for customers, we update the risk cost base we have, the assumptions we have in there, and that has now, as I mentioned, in the first half, that has now been updated with the inflation, the high inflation, that's impacting the higher raw material prices that we see, the higher solvent costs and so forth. So that has been incorporated into our costing model, on the cost we add a margin, and that is what we use for our quotes to the customers. So that has been included there. The quotes that we have submitted to the customers during the first half of this year with that in mind and where we have received a PO, that is already in the business. So it's a question of -- there's obviously a time lag there because as I mentioned, the nature of our business leading into a new year is that we have quite a large percentage of our base already confirmed. So as I mentioned, we had at the beginning of this year, for the full year, we had around 2/3 of the expected revenue. We had that already as confirmed POs with that pricing done at that point in time into our production plan ready for execution and so forth. All future POs after that will incorporate the higher adjusted pricing due to the inflationary effects, the macroeconomic effects and so forth.

I think on your two other questions. So the market growth, we did say a market growth of 10%. At this point of time, we still -- we stick to that estimate. We still believe that overall, the API market for these products would grow by around 10% in the coming few years. In terms of currency effects, we did disclose, in fact, that it has an impact of revenue. What's also important to note is that actually on the profitability on an EBITDA standpoint, the currency impact is negligible. It's actually close to 0 in the way that the negative impact on revenues because we do have revenues in dollars is being equally compensated by the positive impact you get on the cost side. So it is neutral on a profitability standpoint.

Ladies and gentlemen, that was the last question on the telephone. I would now like to turn the conference over to Michael Staheli for the written questions. Michael, please.

Yes. So we have a few questions in the chat system. I believe some of them have been already answered. I just picked those that I believe have not yet been discussed. The first will be for [indiscernible] from Credit Suisse, and I read his question. You expect to spend CHF 70 million to CHF 80 million CapEx per annum over the next few years in your midterm planning. When you have enough operating cash flow to pay for this CapEx? What is your current cash on hand, excluding prepayments from customers? What are your minimum requirements for cash liquidity reserves?

All right. So I can take that question. It's a good question. So what -- maybe starting here with the second half of this year, as you -- based on the guidance that we gave, we foresee a second half of this year where we will increase our operating cash flow in there. So that anticipate -- that is going up. Of course, what we are constantly doing is we're trying to see what we can do and what we can improve for our net working capital, our inventory, get our receivables and they are at this stage in a very good shape, so tracking that, following that, following up with the customers, doing the same on the accounts payables, whatever we can do in our contract liabilities. Sales is working very hard to get as many prepayments in that as possible. So in terms of the actual cash, what we have, so we -- we have disclosed that at the end of June this year, we had a bit more than EUR 66 million in cash. But obviously, this is something that we monitor closely. We will also monitor that closely going forward. That will be also a key thing that will be critical for the midterm as well. And of course, what we are doing as well is we are looking at potentially exploring what we would -- what would be necessary in terms of building some depth going forward.

Our next question was from [indiscernible] global investors. He writes here maintenance CapEx, but I think he means maintenance cost. You alluded to maintenance costs in your EBITDA bridge, you mentioned that 50% to 60% was unanticipated. Could you explain the elements you did not anticipate, please?

Sure there was some additional maintenance cost coming in. So it consists of various different elements and there's also the need for some spare parts. Spare parts that are very important for some of our production, some of our development to be able to ensure that operation continues smoothly going forward, being able to have these spare parts on site in case, given our current production plan, our current H2 that we are looking at is very important for them to have that in case anything would happen to the equipment going forward. And of course, what we're also doing is we are to secure that even further. We have further looked at the maintenance service contracts that we have to make sure that we have the best possible contracts in place for the equipment, whether it's equipment that we have in our development. Very importantly, equipment that we have in the analytical departments to be able to ensure that we on time in full, can do the analytical services for our customers to be able for them to get the deliverables on time so we can [ lease them ] on time.

Okay. And the last question here from the chat that I read is from [indiscernible] from [ Octavian. ] It's about the midterm outlook. Midterm, you are guiding for a low teens revenue CAGR with value growth rates per annum and not a straight line. Would this even mean that we could see negative growth in 1 year, for example, next year with the COVID cliff or should we rather think about single-digit growth rates?

We do not expect negative growth rate going forward, short of any adverse events, no. I think it's better to think about it as a slow and low level of growth.

Good. I think these were all the questions that I wanted to read from the chat. At this point. With this, I hand over to the operator.

Thank you very much. I'll hand back to you for any closing remarks. Raymond, we don't have any more questions on the telephone.

Okay. Having said that, I would like to thank all of you for participating to the conference today. I hope we were able to provide a little bit more color, transparency on the performance to date as well as how we look at the business going forward. Obviously, we'll be happy to continue the dialogue with you. And we're looking forward, we do have a busy agenda of Investor Relations interaction in the next few weeks, and we look forward to continuing interaction and answering any questions that you have. If you do have in a mean time in anything, do not hesitate to contact us and directly contact Michael, we'll be very happy to be as responsive as we can. Thank you very much for your time.