Evotec - Q4 2023

Transcript

Operator (participant)

Ladies and gentlemen, welcome to the Evotec SE Annual Report 2023 conference call. I'm Moritz, the call operator. I would like to remind you that all participants will be in a listen-only mode and the conference is being recorded. For operator assistance, please press star and 0. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Volker Braun, head of IR and ESG. Please go ahead, sir.

Volker Braun (Head of Investor Relations and ESG)

Thank you, Moritz. Good day, good morning to all of you on the call. I'm sure you all have seen our press release on our 2023 results this morning, as well as the announcement last night on the appointment of Dr. Christian Wojczewski, who will be our new CEO of 1st of July. This development is the reason why we also have Iris Löw-Friedrich, our Chairwoman of the Supervisory Board, with us on the call today. Before we go there, it's my obligation to familiarize you with the cautionary language we have outlined on page two. Now, without further ado, I would like to hand over to Iris. Please, Iris, the floor is yours.

Iris Löw-Friedrich (Chairwoman of the Supervisory Board)

Yeah, Volker, thank you very much. A very warm welcome to all of you also from my side. We are ready to win the future for Evotec. Our core offerings are in high demand. Our business model is solid. Business is growing. We focus on profitability. Most importantly, we have a super strong team in place, and we are strengthening the leadership in Evotec further. That's the reason why I participate as the Chair of the Supervisory Board in a regular full-year results call today. With me today are Laetitia Rouxel, our Chief Financial Officer, who will cover the review on Evotec's performance in 2023, followed by Matthias Evers, our Chief Business Officer, who will guide you through the rationale and the details of the reset of the company's priorities for the coming year.

Our Chief Operating Officer, Craig Johnstone, and our Chief Scientific Officer, Cord Dohrmann, will stand by to answer any questions you may want to address to them during the Q&A session. I have the duty to excuse Mario Polywka, our interim CEO, who is ill today and unfortunately not able to participate in this call, so we send him our best wishes for recovery. I would like to deeply thank Laetitia and Matthias for stepping in for Mario on short notice. Before we move to operational topics, please allow me to share the good news on the supervisory board's actions taken during the last close to four months. These efforts have led to the successful appointment of Dr. Christian Wojczewski as our new CEO and of Aurélie Dalbiez as the newly created management board role of a Chief People Officer. A few words about the new CEO.

The Evotec turnaround starts with a high-performing team at the top. If I can speak about myself, but I know it's also on behalf of the entire Supervisory Board, we all feel highly accountable to drive the reset of the company, starting with the best leader for the further evolution of Evotec with all the relevant stakeholders in mind. We are confident that we have made the right choice. We reviewed a wide slate of diverse internal and external candidates. We ran a structured interview process with more than 10 candidates and an in-depth in-person workshop with the five finalists. We pressure-tested their approach to our business. We tested their strategic competency, their operational execution, their experience, and, of course, their leadership skills.

The appointment of Christian Wojczewski as the new CEO of Evotec underscores our determination to drive a turnaround with a focus on profitability, efficiency, and highest performance, while, of course, we need to further evolve the excellence science in all businesses of Evotec. Christian Wojczewski comes with an impressive track record of successful transformational change in the life sciences business, the creation of high-performing organizations, and a clear focus on profitable growth. He demonstrated his strategic and operational leadership skills at the executive board of Linde, where he transformed the healthcare business into a global market leader with sales tripled and leading EBITDA margins. As the CEO of Mediq, he transformed the business from a distribution model to a service model with streamlined business processes, a focused portfolio, and a high-performance culture. All of this resulted in a turnaround towards profitable growth.

These experiences will, of course, benefit Evotec greatly. So Christian is an accomplished leader who will make Evotec fit for a prosperous future. Next slide, please. The management team is further strengthened with the addition of Aurélie Dalbiez, our first Chief People Officer. Aurélie joins us from Corbion, where she was the Chief Human Resources Officer. She comes with a longstanding career in talent-related positions. Aurélie will ensure the alignment of the Evotec people strategy and cultural evolution with the company strategy, while she will further evolve sustainability, first and foremost creating an inclusive culture with proficient teamwork, innovation, and customer orientation top of mind. Aurélie was chosen following another intense search process, which illustrated once more that Evotec is highly attractive for eminent leaders.

The combination of heightened attention to our people in Evotec with our high-quality science and innovation and with a performance-oriented business model will make us unique and, I'm deeply convinced, finally unbeatable. I recognize that we have a lot of work to do to achieve this, and the reset has started. With that, it's my pleasure to hand over to Laetitia to familiarize you all with the details of Evotec's performance in 2023 and the most recent developments.

Laetitia Rouxel (CFO)

Thank you, Iris. A warm welcome to all of you for joining us today to delve into our performance of the financial year 2023. It was a very intense year for Evotec. It started off extremely strong. We expanded and extended two collaborations with BMS and were able to win Janssen as a strong partner in the field of oncology.

On April 6th, we have been hit by the cyber incident that had led to EUR 70 million missed revenue in 2023, largely in Q2. Despite all the challenges, we could celebrate successes with just signing a technology alliance with Sandoz in May, validating the just value proposition. Through our focused efforts, we have seen a strong recovery of the business in Q3, coming back to 80% of operations with a strong revenue growth of 13%. In Q4, we faced a challenging market environment that was still masked by positive contribution from the fading cyber incident recovery. With that said, let us take a look at the full-year results. We are pleased to report that our revised guidance for 2023 was fully achieved. Our group revenues for the year were EUR 781.4 million, in the upper range of EUR 750 million-EUR 790 million as we had projected.

Unpartnered R&D expenses totaled EUR 64.8 million, falling within our estimated range of EUR 60 million-EUR 70 million, and reflected our continued focus on innovation and growth. The adjusted EBITDA for the year was EUR 66.4 million, meeting our guidance range of EUR 60 million-EUR 80 million. As just mentioned, we achieved EUR 781.4 million revenue in 2023, a solid 4% increase compared to the previous year, and despite facing significant operational cyber-related impacts for the majority of Q2. These headwinds, mainly in our development and Cyprotex business, were more than offset by the strong performance from our key strategic partnerships. Notably, revenue from Just-Evotec Biologics reached EUR 108.4 million, reflecting a remarkable growth of more than 110% compared to the prior year. This substantial increase underscores the success of our partnerships, especially with Sandoz and the strengthening of our portfolio.

Our gross margin experienced some pressure, declining slightly to 22.6% from 23.2% due to the cyber incident, development market challenges, the ramp-up of capacity at Just – Evotec Biologics, and excluding Just – Evotec Biologics gross margin, would have been 27%. We remain committed to investing in the future with unpartnered R&D expenses of EUR 64.8 million as we continue to drive innovation. Adjusted group EBITDA for the year was EUR 66.4 million, marking a 34% decline from last year, largely due to non-recoverable business and reduced capacity utilization in Q2, of which cyber-related costs included in EBITDA represent EUR 26.5 million. Excluding Just – Evotec Biologics, adjusted group EBITDA would be at EUR 72.7 million, with Evotec absorbing most of cyber-related expenses. Furthermore, we are proud to have made significant strides in sustainability, reducing our Scope 1 and 2 emissions by 29% to 27,480 tons CO2 equivalent as we are growing greener.

As outlined on the previous slide, Innovate has an excellent growth of more than 30% despite the challenges we faced. Main drivers for this positive development were the extension and expansion of contracts with BMS in neurodegeneration as well as in target protein degradation. Also, new collaboration with Janssen in cell therapy as well as the tech alliance with Sandoz demonstrates that demand for differentiated and paradigm-shifting technology platforms is very robust and a truly distinctive factor in an overall challenging market. As we indicate here on the slide as well, our full-sales funnel has grown significantly across Shared R&D, and particularly also since validation of our Just – Evotec Biologics CDMO offering. A substantial part of these opportunities sits in early funnel stages, and we are working hard on conversion, winning this new partnership and translating this into revenues in later 2024 and 2025.

Total Execute segment, including intersegment revenue, had stable revenues at EUR 738.7 million, driven by the Sandoz collaboration, yielding a gross margin of 20.9%. Innovate segment revenue was EUR 266.9 million in 2023, reflecting a gross margin of 30.8%. Despite the strong challenges this year, we achieved a 4% organic growth in group revenues. As mentioned, Just – Evotec Biologics revenue rose by 111%, demonstrating exceptional growth driven by the collaboration with Sandoz. Innovate reported a 30% increase, showing strong momentum attributable mainly to BMS and other key strategic partnerships. As we mentioned in our previous call, Execute was mostly adversely impacted by the voluntary shutdown of our operations in response to the cyber incident and the softening market towards the end of the year. However, overall segment revenues for Execute grew year-over-year, inclusive of intersegment revenues, as we reallocated resources towards supporting high-value partnerships within the Innovate segments.

Despite a lower contribution from milestones upfront and licenses, our diverse business model continues to show its robustness, maintaining a solid gross margin of 27% excluding just biologics. Focusing on Q4, group revenue were EUR 201.3 million, reflecting a 16.4% decline compared to the strong comparable base in 2022. While in a challenging market, positive contributions were related to BMS Celgene programs and the successful delivery of work packages as part of our new technology partnership with Sandoz. It's important to note that the revenue mix had a very different structure as opposed to Q4 2022. Contribution from milestone to the tune of EUR 17.7 million were significant in the last year's quarter, while Q4 2023 was a rather modest period with milestones and upfront payment reaching EUR 1.2 million.

Also, Q4 2022 saw the one-off effect of royalty income from SK Bio of about EUR 2 million, which had a positive effect on margins too. Gross margin contracted to 18.7% compared to a robust quarter of previous year, influenced by the overhang of low sales during the cyber incident, challenging market conditions, unfavorable sales mix, and reduced milestones upfront and license payments, and ramp-up of the costs of Just – Evotec Biologics also impacted the margin while showing our commitment for the future growth. Switching now our focus to cost management, R&D expenses were EUR 20.2 million for the quarter, 5.4% lower than the comparable prior year period. This decrease was influenced by a temporary reduction in R&D costs stemming from the cyber incident but still indicates our strong dedication to innovation.

Our adjusted group EBITDA, which does not include external one-off cyber-related costs for the last quarter of 2023, represents EUR 16.5 million compared to EUR 57.1 million in Q4 2022. While the gap is significant, I want to recall that Q4 2022 was the strongest quarter in Evotec history by a wide margin, and year-over-year comparison is to be seen in that context. The negative development in Q4 2023 triggered the need for a comprehensive review of the business. Together with Mario, we therefore initiated an in-depth analysis to assess measures needed to foster a sustainable, profitable growth in the future. With that, I would like to hand over to Matthias to share with you our thought process, findings, and decision on actions to be taken.

Matthias Evers (Chief Business Officer)

Great. Thank you very much, Laetitia. Good morning. Good afternoon also from my side. Basically, as information about the developments in Q4 materialized, we launched this structured performance review looking closely at the external environment as well as our inner workings. Let me share with you the top-level results today in the form of a SWOT analysis. I will basically walk from the bottom to the top. I start with the more external-oriented dimensions, opportunities and threats, and then to the strengths and weaknesses. Opportunities. I start therefore for hopefully an obvious reason because we face very strong demand and opportunities in terms of expanding our human-data-centric multi-omics approach to R&D. Here mentioned the molecular patient database, which is at the heart of our PanOmics efforts.

Clearly, it has been behind the numbers, and my colleague Laetitia mentioned it, we have seen the commercial validation of Just – Evotec Biologics. We have seen an increasing demand. We have fully capitalized on it. We have a full sales order book. We are quite careful to describe the U.S. Biosecure bill as an opportunity. We just want to signal we are here for the partners in the U.S. to collaborate with them with our global footprint. When it comes to threats, we describe the market at this point of time as a bearish market with more challenging dynamics. I will go later in the presentation a little bit into the drivers, but it's fair to say that particularly for biotech companies, 2023 and now 2024 has been a difficult environment. So we see a market recovery towards 2025, and that is, of course, as stated, a threat.

Let me move to our strengths. Here, I want to be very clear that our scientific expertise combined with our track record, our differentiating capabilities on our integrated end-to-end platform lead to very strong demand that has led to double-digit growth, has led to an expansion of our sales pipeline. We see a demand for this including and leading to customer retention rates north of 90%. There is clearly a weakness identified, and I will come also in this presentation with our response against it. To put plainly, we have found an internal complexity and operational inefficiencies that we are targeting now head-on. When it comes to our capacity, there's a temporary mismatch because we have seen the softening in the more transactional parts of our business. We have to call it temporary, something that we can repair quite quickly, and we have a plan for that.

With that, let me move to the next chapter of this presentation, which is about the priority reset we are introducing here today. Then Laetitia will continue later on guidance and outlook. As we talk about new priorities, I think it's very important we put those into external context. As promised, I want to talk a little bit more about how we see the market today. Clearly, there is demand, but we have seen cost containment on the biotech side, on the big pharma side. What is for us relevant to say, we have less Series A, Series B events. So roughly 40% of our business sits in biotech, and that share has gone down a bit because there are simply less new starts in the biotech segment.

Overall, I think the market summary is that the effort towards conversion and towards winning business is higher, and we have seen that also in our peer group performance. In summary, I would conclude that we see green shoots in the market like competitors. We see that more towards the end of the year into 2025 and see this type of market environment as a context for the priorities I'm now introducing. If we move on. We as an organization clearly commit to three priorities under the header towards profitable growth. So we are clearly a company growing at double-digit following this demand, but this growth has to be profitable. Priority number one, clearly, and I will detail it in a second. Just wait. I will detail it in a second. Deals with focusing on what we are good at and driving smart partnering.

Secondly, we are now adjusting our organization and footprint. Number three, we put the strongest possible team in place for today, focusing on the management board, but of course, going beyond. Now, indeed, let me double-click a little bit into the first priority. You see here two illustrative analyses of where the money is going in deal-making, one by therapeutic area, one by modality. In short, it's fair to say we have massive opportunities as we are well aligned against these areas, let's say in oncology, neurology, cardiovascular, or in the core modalities. What we are doing here is doubling down, and I would call these actions our growth program because it's a careful alignment. To become a little bit more specific, an example is, for instance, metabolic obesity, that we align our efforts in R&D, our strengths against where the market demand is.

We clearly double down on key modalities, and that has to be seen also in the context of Just – Evotec Biologics, where we have a fantastic offering for complex biotherapeutics. We focus on what we get very strong feedback on, our flexible partnering that we offer win-win models from our partners from foundation to biotech to big pharma, but clearly prioritizing our models where we cover our R&D funding and generate upsides. With that, let me hand over to you, Laetitia, to detail the restructuring parts of our priorities.

Laetitia Rouxel (CFO)

Thank you, Matthias. Resetting our focus and offering to a changing environment comes with the need to adjust our organization and footprint to the new realities. Our restructuring focuses are on three targets. One, optimization of our organizational structure and operational model. Two, adjustment of our footprint and capacity optimization. And three, as well as improving the efficiency of our enabling function. We completed the diagnostic, and we are now working with full effort on multiple key levers. As a result, we expect to generate visible margin improvements over the coming years. The measures identified at this stage should result in an annualized benefit on EBITDA of more than EUR 40 million. For 2024, we will see a prorata effect and expect to see a first full impact by 2025. I would highlight our effort in three key levers there.

In procurement, for instance, we aim to leverage our global scale, harmonize and optimize pricing for the goods and services we are buying, and rationalize diversity in what we buy. They may be low-hanging fruit, but they require flawless execution that we commit to. Second, focusing on the right-sizing capacity with the right expertise. And thirdly, simplify internal structure like the new segment reporting, which brings us to the next slide, where we are grouping the former innovate and execute offering, excluding just biologics, into our end-to-end platform serving 500+ partners. This segment will be called Shared R&D. With that, we reduce the recognition of intersegments revenues of, meanwhile, more than EUR 200 million. This will reduce redundancies of internal structures and will lead to more efficient and leaner processes.

The new segment reporting will also give better transparency to Just Biologics in line with what we heard during our past interactions with you. The new structure will be in place as of Q1 2024 reporting, and we will provide more detailed information on comparable numbers versus 2023 in due course. Talking about the start of the year, which in essence saw a continuation of the patterns we saw during Q4, let me share a view on our expectations for 2024. At this stage, we expect revenue growth to remain robust at low double-digit rates while the mix is set to change versus prior years. Just Biologics as well as differentiated offerings will drive the business while more transactional businesses are likely facing a challenging environment this year.

Future growth, more favorable business mix, as well as our efficiency improvement measures on EBITDA are the basis to assume that EBITDA will grow middle double digit. Further details of refined guidance will be dependent on the overall market environment, win rates of existing leads and new collaboration, and phasing of the efficiency gains in 2024. To recap, I want to emphasize our strengths in revenue growth while we focus on driving profitability. The structure of our revenue mix suggests that growth at Just – Evotec Biologics will be faster than in Shared R&D in the coming years. At this stage, we expect a stable growth of revenue related to milestone and royalty payments given the growing breadth and depth of our portfolio. For 2025, we expect the double-digit revenue growth at Evotec to continue bringing us into the ballpark of EUR 1 billion revenue.

In general, we anticipate the midterm growth profile to remain similar to patterns in the past. As we are here for the long term, we expect a more favorable revenue mix and more efficient structures to build the basis for the very profitable growth. The details of this new midterm outlook will be assessed together with Christian, and we plan to provide the first update also in August. As Iris mentioned already, we can say that our supervisory board successfully executed with regard to priority three on our list, which is strengthening our internal team. We look forward to working together with Christian and Aurélie to shape Evotec's sustainable growth path into the future. They represent two important additions as an example of how important it is for us to focus on talents and fostering expertise at Evotec.

Here are the next important dates of our financial communication in 2024. To conclude, we have fully met our 2023 revised guidance. We confirm double-digit top-line growth for 2024. We confirm mid-double-digit EBITDA growth for 2024 and will continue to outpace revenue growth in the years to come. We are resetting and right-sizing our operations to drastically enhance profitability. Finally, we are looking forward to driving the next phase with Christian and Aurélie on board.

Volker Braun (Head of Investor Relations and ESG)

Thank you, Laetitia and team. We are now looking forward to taking the questions from people attending the call. I ask Moritz to start the Q&A session now, please.

Operator (participant)

Ladies and gentlemen, at this time, we begin the question-and-answer session. Anyone who wishes to ask a question may press star followed by one on your touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you need the help of an operator, please press star followed by 0. For anyone who has a question, may press star followed by one at this time. One moment for the first question, please. The first question comes from Peter Verdult from Citi. Please go ahead.

Peter Verdult (Managing Director and Analyst at Citi of European Major Pharmaceuticals.)

Thank you. Peter Verdult here from Citi. Lots to discuss. I'll restrict myself. I'd like to take your patience to three questions or a number of topics to cover. Maybe just starting with Laetitia. I just want to kick the tires on the guidance you provided for 2024 and some of the comments you're making about 2025. I mean, when I try and quantify it, it looks like you're promising the market at least EUR 100 million there in 2024 and EUR 200 million+ in 2025. So the key question for myself as well as Sharon and potential investors we've spoken to today is just assessing any further downside risks here. So my question bluntly is, have you basically kitchen-sinked the numbers to reflect the market environment but also to ensure that Christian has a smooth start as the new CEO?

Is there anything you can push back on, all the big dynamics or what you're seeing in terms of customer conversations around the Biosecure Act that could give us more confidence that there's no further downside risks? Just to make it clear for Laetitia, you gave me the dark bridge many times in terms of how we got to that EUR 300 million, the base business, biologics through its profitability, and assumptions on milestones. Is there anything in particular that's deteriorating? I mean, is it a little bit of everything? But can you just walk us through exactly where that shortfall comes because it feels like your revenue outlook is not hugely different to where the market currently is? And then lastly, maybe for Iris, when speaking about Evotec with potential investors, they always raise the concerns around regulatory risks given the actions of the prior CEO.

When can we draw a line? When do you expect to hear from BaFin whether they opine that this really was the actions of a bad actor or that there's a risk around or they're having concerns around systemic failures? So could you address the sort of regulatory risk concerns that often come up when discussing Evotec with investors? Thank you.

Volker Braun (Head of Investor Relations and ESG)

Okay. So the first set of questions, I think, will be covered jointly by Matthias and Laetitia. And Iris will then cover the regulatory question.

Matthias Evers (Chief Business Officer)

Hey, Peter. Greetings. We must admit, the voice line, it was hard to get all details. We will start, and please feel free to follow up with questions. I mean, it's an important discussion, so please bear with us. I think at the heart of the question we heard, of course, are we basically suggesting EUR 100 million and what happened basically in multiple ways? So let's maybe restate a couple of assumptions. Number one is we see uncertainty at this point of time given what we have observed from that review. And yes, we want to give the new CEO a chance to review where we stand in the business. And so yes, that's why we are actually giving only qualitative guidance at this moment of time. Ballpark-wise, I think you're right level-wise. I mean, that's what we are signaling in terms of EUR 100 million and upwards.

But we give qualitative guidance at this moment of time. The underlying big question is, of course, what happened? Now, I think softening of the more transactional parts in the business. We started articulating in Q3. I think in the November discussion, we had a particularly pointed out development. And that has two, three drivers. That was, of course, coming back out of the effects of the cyberattack, the hardest in the GMP area. There was also part of a very bad biotech environment where we basically see a hit on our transactional business. And that was a bit overshadowed by the business coming back the hockey stick after the recovery. So we see the full effect in Q1. And that's why I've been trying to outline the distinction between the high demand for our strategic, what we now more and more call the pipeline co-creation offering.

We see recovery, and we are clearly in the game with a very specific value proposition. And I give you one green shot. That's our INDiGO offering where we provide end-to-end development offerings for biotech and see green shots. But we see also at this moment of time, given market and given that situation, high uncertainty plus CEO. That's basically the answer why we give that qualitative guidance at this moment of time. Laetitia, any additional comments? Or Peter, come back if we missed nuances because, again, it was a little bit hard to hear before we moved to Iris.

Peter Verdult (Managing Director and Analyst at Citi of European Major Pharmaceuticals.)

I'm going to kick it to you. I'll come back. But let's go to Iris.

Iris Löw-Friedrich (Chairwoman of the Supervisory Board)

Yeah.

Matthias Evers (Chief Business Officer)

Thank you.

Iris Löw-Friedrich (Chairwoman of the Supervisory Board)

Peter, thanks for the regulatory question. So at this point in time, we have no regulatory action ongoing, no inquiry, no action against the company. So on our side, it's all clean. Of course, I cannot speak on behalf of the regulators. So your question around timeline is something that is out of our control. And that's why I can't comment on behalf of Evotec for this.

Peter Verdult (Managing Director and Analyst at Citi of European Major Pharmaceuticals.)

Thank you.

Volker Braun (Head of Investor Relations and ESG)

The next question then, please.

Operator (participant)

The next question comes from Charles Weston from RBC. Please go ahead.

Charles Weston (Managing Director of Healthcare Equity Research)

Hello. Thanks for taking the questions. I wanted to dig into something, I guess, a bit similar. It was only around three months ago that you reiterated the 2025 expectations. So can you just help us explain how the market has evolved literally in just the last few months to make you sort of change your view and become more cautious on that? Can you perhaps give us some examples of things that maybe have happened or haven't happened over the last few months that have led you to change that view? And then you mentioned it was partly to do with trading. And you talked about soft demand and biotech demand and biotech funding. But you've also talked about pricing pressure. So could you comment a bit on the competitive dynamics?

Then lastly, at the lower end of the revenue guide, there's essentially no growth in the business overall if we add back the EUR 70 million of lost revenues for Q2. So we sort of reset that base. Alternatively, we could look at this as a significant decline in light of the non-Just Evotec Biologics business. So can you help us just by perhaps giving us some numbers and guidance around how much of the business you classify as transactional and how much is sort of more value-add? And perhaps out of the revenue growth that you've told us, kind of what the dynamics might be in those two businesses, how much could transactional be down in 2025 and 2024, sorry?

Volker Braun (Head of Investor Relations and ESG)

Good. I think the question one and two will be answered by Matthias. On transactional business revenue share, I think that goes with Laetitia.

Matthias Evers (Chief Business Officer)

Charles, thank you. This is, of course, a very important question. And let me try to answer it in a simple way from two sides. And I start with the backend of your question because you're saying, is that de facto a decline, including the EUR 70 million? We talked about it as an estimated effect or revenue loss from cyber. I think first, let me turn around that statement a bit and say, in 2023, we delivered revenue growth more or less with a highly impacted quarter operationally. So we delivered growth. It's too simple to say it was nine months. But for simplicity's sake, with a lost quarter, we delivered growth. Now, to transition back to the new base, it's a little bit harder than just saying our operations are back because, particularly in development and in the Cyprotex business, we have to basically regrow the sales pipeline.

And I mean, it's like we lost a little bit the momentum, and we see the buildup. But it will take some time. So we are not giving up the numbers. We are not giving up the demand. But it will easily take six-nine months to rebuild that momentum. So we cannot just switch the business back on. It's particularly relevant also in the very fast-moving transactional Cyprotex business, which is our ADME-Tox solution. So I want to acknowledge your point because if we let the numbers speak, it's, of course, if we would include the EUR 70 million, a much more moderate growth. But we see it as significant double-digit growth versus our 2023 base because we have to rebuild that momentum. Your first part of the question, what is moving, what is shifting, and the need for examples? So first of all, we see a bias market dynamic.

What is that? We see less incoming requests. So there's less demand. Why is that? 40% of our business were biotech. Now, if you look at the first funding event, so new biotechs is basically back to 2014, 2015 levels. Many analysts call 2023 the worst year in biotech. And that effect is visible for us. So we have seen the share of biotech from roughly 40% going down to 34%. And that is, of course, one contributor. Second contributor, in a world where of cost-constrained in share price pressure, I think the procurement dynamics are more significant. So yes, there is price pressure. We hold up well. Our win rate is significant. But the effort to win, it takes longer. So there is slower conversion. So we would talk a bit more about deceleration of our business versus losing while there is competitive pressure on price points.

That together leads us to a very strong conviction that we get basically continuous double-digit growth. But we don't see fully the point just to switch back to 70 and start from a larger base. Hopefully, that addresses those points, Charles. And then I give it further to Laetitia.

Iris Löw-Friedrich (Chairwoman of the Supervisory Board)

To answer your question on the share of our business on the transactional business part, it reflects an average of 20% currently of the business, which is a bit more under pressure if you want to have the direction. I would say it's offset by the other direction coming from Just Biologics, which is growing shares in our 2024 revenue equation to be closer to the same representation of 20%. Is that?

Charles Weston (Managing Director of Healthcare Equity Research)

Thank you, Yes. So the 20% could be down, potentially down substantially. Just Biologics up substantially. And then the rest of sort of executes and innovates could be up.

Matthias Evers (Chief Business Officer)

To be very clear, I mean, you can assume a similar growth trajectory also to next year for Just – Evotec Biologics as you have seen?

Charles Weston (Managing Director of Healthcare Equity Research)

As a percentage?

Matthias Evers (Chief Business Officer)

I make a qualitative statement, a similar ballpark growth rate.

Charles Weston (Managing Director of Healthcare Equity Research)

Okay. Thank you.

Operator (participant)

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

Michael Ryskin (Research Analyst)

Thanks for the question. I want to follow up a little bit first with something on the underlying market conditions. I hear you that 2023 was a challenging year and that funding still remains low, especially for biotechs. But I think elsewhere, we're actually hearing early commentary of improving market conditions already, of more proposals, more requests for outsourcing because Q1 was a very good quarter. So that's giving people some confidence that 2024 is a recovery year. It seems like you're still a little bit more cautious. Is there any reason you're not seeing some of those proposals and some of that request done yet? Is it related to what you're talking about in terms of getting the business back on track? And if that's the case, what gives you confidence that this isn't a permanent share shift or share loss?

Matthias Evers (Chief Business Officer)

Thank you for the question. It's very good and takes another lens at the market. So we hear that as well. And I talked a little bit about green shoots. We are indeed a little bit more careful. So we observe, I mean, if I'm a little bit more specific than before, in terms of seed rounds, we see an improved climate. And there are new entities being formed. And we see requests. Now, do we see an uptick on Series A, Series B already? No. I think the math and the market intelligence is very clear on that. So do we see big pharma acquisitions as exit points for biotech? Absolutely, yes. Do we see external outsourcing ideas also?

But in aggregate, and given the scale of our business, we are indeed a little bit more careful because we also sometimes feel there's a little bit wishful thinking on very early signals. And that's the last thing we want to do. So we want to be very transparent on the demand along the core of our business, which I think we summarize here: strong demand on the strategic parts, some more deceleration or call it harder conversion on our transactional part. And this allows me also to very clearly repeat that high double-digit growth, similar growth for our Just – Evotec Biologics business where we rather face the topic of capacity constraints more than anything else.

Michael Ryskin (Research Analyst)

Okay. All right. That's helpful. And then my follow-up question is on the right-sizing that you talked about, the reset, the profitable growth. You talked about annualized EBIT improvement of greater than EUR 40 million over time. Could you provide any more clarity on where you're doing some of that right-sizing? You talked a little bit about trimming the unpartnered R&D. But EUR 40 million is a pretty meaningful improvement in EBITDA. So any particular areas, any particular product offerings, that would be helpful. Thanks.

Matthias Evers (Chief Business Officer)

Laetitia will take that question.

Iris Löw-Friedrich (Chairwoman of the Supervisory Board)

So regarding the optimization cost structure that we have in mind, the EUR 40 million we share today with you, I would be a bit more precise, is not less than EUR 40 million. It's above EUR 40 million. And it's an annualized figure. So obviously, we will not be able in 2024 to generate the full scope of those savings. But this is expected for 2025 in full. So I think it answers your first question, when we will get this amount in the financials. So expect a full impact in 2025. And having in 2024, we are working with internal and external stakeholders to fine-tune. And we come back in the mid-year result with you to go with more precise numbers. But of course, we will have factored some of those savings already this year.

Then, coming on the area we are looking at, and I will repeat a little bit what we said just before. It's one around the organizational structure and the operating model that we have, that now we are folding the segments. We get more efficiency. It doesn't change anything on the quality of what we deliver to our customers. It's really internal optimization to be more optimized in what we deliver from a cost perspective and efficiency overall for our people. The second area is around the footprint and the capacity optimization. Of course, it's really a topic that we are looking at in the light of what's the market dynamic. And we are obviously looking at matching our current operations and capacities with what the market dynamic is.

But of course, it doesn't jeopardize any of the contracts we have currently that we have capacity to deliver, of course. And then the other area so we are looking at is around the enabling function efficiency. And there, you have different parts of the exercise. I mentioned the procurement area, which is a low-hanging fruit, I would say, relatively simple topic. It's a non-people topic. But we have really to make that efficient this year. And I think it's really something that will generate already in 2024 some savings. So it's on the part of the non-people related. And then I would say related to our organization, the footprint and the capacity optimization as well as the enabling function efficiency organization will come with people reduction overall and hiring plan review based on the exercise and the review we are currently running.

So I would say it falls into our buying power, our buying cost that we want to optimize, our footprint that we are also some fixed cost on our footprint that is not adapted at the current situation, and people cost. I would say that would be around those three main areas that we see the savings coming from.

Michael Ryskin (Research Analyst)

Okay. All right. Thank you.

Operator (participant)

The next question comes from Jacqueline Kisa from TD Cowen. Please go ahead.

Jacqueline Kisa (Equity Research Associate)

Hi. This is Jacqueline Kisa on for Steven Mah at TD Cowen. Thank you for taking the questions. The Biosecure Act previously named companies like WuXi Biologics as companies of concern. Has this impacted business development discussions with your customers? And if so, have those customers been across the board or more with emerging biotech? And then with regards to your J.POD facility, could you update us on the current operating capacity of the facility? And do you expect to have the capacity to take in new customers in the event there is a shift from WuXi? And then finally, when can we expect the operating J.POD facility to reach scale? Thank you.

Volker Braun (Head of Investor Relations and ESG)

All three questions are directed to Matthias.

Matthias Evers (Chief Business Officer)

Okay, Jacqueline. And Steve, in representation, thank you for the question. Biosecure, you might have seen quotes from us in a recent Endpoints article. I would start there that we say we feel they are globally respected companies, I mean, the companies you mentioned. But we are ready to serve partners with our global footprint, with a footprint in the U.S. and in Europe. We see a shift in discussions, I think more pronounced on our Just – Evotec Biologics, so on the biologics front, where I think we get more RFIs, interest exploration. It's early days. But we see a remarkable shift. It's hard to pinpoint exactly Biosecure versus, frankly, a completely validated technology where partners are convinced about our cost differential in terms of COGS, our high quality and high flexibility. It's, of course, a mix of these factors.

But we feel we see a notable shift. When it's on the discovery and development side in our core business, it's early days. But I would say we are carefully optimistic also on the big pharma side, so with the U.S. players, with big exposure to Asia, that there's a slow process. And we are ready to serve them. Now, when it comes to J.POD particularly in terms of new capacity so first of all, I'm happy to report that we are, of course, fully on track to launch our J.POD 2 in Toulouse. I think we are planning for a grand opening in September. And this will add substantial capacity. And yes, we are ready to serve new partners, absolutely, because we want to bring in molecules and bring in molecules quickly to commercial stage onto our platform. So the answer is yes.

But the message also to our partners, but I'm happy to give that message here. I mean, when partners are constrained, now's the time to invest and put money behind the demand where we can be, of course, partners to expand capacity for further partners. It could be additional trains or additional facilities down the road. Hopefully, that covers that.

Jacqueline Kisa (Equity Research Associate)

Great. Thank you.

Volker Braun (Head of Investor Relations and ESG)

Then we can go to the next question.

Operator (participant)

The next question comes from Falco Friedrichs from Deutsche Bank. Please go ahead.

Falco Friedrichs (Director of Equity Research)

Thank you for taking my questions. Good afternoon. My first question, thank you for providing us with sort of a rough ballpark number for EBITDA in 2024. Could we do the same exercise for 2025, please? It's super difficult from the outside right now to pinpoint where you could land considering all of these different moving parts and your kitchen sinking exercise here. So is it fair that sort of the EUR 250 million market expectation is still in play when including the EUR 40 million of savings, or would you point us to a lower number? Then secondly, you mentioned that this temporary mismatch of demand versus capacities, that this could be fixed relatively quickly. Can you add a little bit more color here? Sort of are we speaking about a few months, or is that something over the next two to three years that would be super helpful?

Then my third question, I think it would give all of us a bit more comfort if you could share if the new CEO has been involved in this type of guidance exercise you've done at all at this point. I just want to make sure that we're not sitting here again in the middle of August. And instead of EUR 100 million, we're speaking about EUR 80 million. So maybe you can share a little bit more to what extent the new CEO was involved. Thank you.

Volker Braun (Head of Investor Relations and ESG)

Thank you, Falco. I take the liberty to take first question. Then on demand and capacity, I guess Craig will take it together with Matthias. And with regard to the involvement of Christian, a few words from Iris, but I guess I know the answer already. But we will see. So on the 2025 guidance or no, it's not a guidance, has never been, by the way. It has always been an outlook, a midterm outlook. And you heard Laetitia saying that the EUR 1 billion is still within reach with double-digit growth in the next two years. And then we need to adjust the cost structure accordingly. And then we will see where we end. And we will provide an update by mid this year in August together with the entire team. So please bear with us. And Craig.

Craig Johnstone (COO)

Yeah. And then thanks for the question. So in terms of the right-sizing and the balance between demand and capacity and addressing the overcapacity, of course, we have a number of threads to that rebalancing and cost-saving exercise, as Laetitia alluded. One of them, there are some aspects which can be conducted relatively rapidly, such as a reduction in physical footprint and bringing certain facilities into a fallow state, for example. And that saves a lot of energy. And that can be relatively rapid. But on the other hand, where we come into headcount reductions, we've got to follow the various social processes and laws in the countries in which we operate.

And of course, that varies from country to country but is generally, in Europe, relatively slow and cautious because of various employee processes, which means that it will take some months as we work through the full details of our plans, first of all, our works council engagements, and then decisions and implementations, which will take much of 2024, which is why we're indicating that there will be pro-rata guidance in 2024 and then full-year impact only in 2025.

Iris Löw-Friedrich (Chairwoman of the Supervisory Board)

On the involvement, Falco, of the new CEO in the guidance, please be mindful that Christian just signed his contract yesterday, right? That's why you saw the press release last night. So it would have been inappropriate to involve him into these types of discussions. Please rest assured that his onboarding will start now and that he will have a jump-start when he joins us on the 1st of July. And of course, the Supervisory Board has pressure-tested what has been shared today. So please stay tuned for the new guidance then with the new CEO later this year.

Falco Friedrichs (Director of Equity Research)

Okay. Thank you.

Operator (participant)

And the next question comes from Peter Verdault from Citi. Please go ahead.

Peter Verdult (Managing Director and Analyst at Citi of European Major Pharmaceuticals.)

Sorry. It's Peter here from Citi. Just a couple of follow-ups. Hopefully, the line is clearer now. Just maybe from Matthias, I think, or Laetitia, prior communication was for Just Biologics to reach profitability in 2025. And I think you were nearly there in 2023. But I'm also sensing there's increased investment you had to lose coming online. So just wanted to sense a blunt question. When do you expect Just Biologics to reach profitability? I'll pause there and follow up with my second question.

Matthias Evers (Chief Business Officer)

Peter, thank you for the question. I take it. I think you observe right. We were nearly there. So we were trending towards profitability in quarter four as we indicated. And based on that, we have planned for a budget that reaches profitability in 2024. And that's what we are working against as we are growing. So it's in the spirit of efficient, profitable growth. That's what we are aiming here to deliver.

Peter Verdult (Managing Director and Analyst at Citi of European Major Pharmaceuticals.)

Okay. And my second question, and I'm just sort of to layer the point, but in terms of backlog, and again, you've been making some quite confident statements around revenue outlook and perhaps being able to achieve that EUR 1 billion revenue target still in 2025, could you remind us I know you usually give this number, but you've said in the past that your backlog in Biologics is EUR 6,700, if not more. But could you give us a sense how the backlog is looking across the broader business, just to give especially given that we're now four, five months into the year, just confidence in that EUR 100 million EBITDA number for 2024? Thank you.

Craig Johnstone (COO)

Let's try from a few angles, Peter. So let's start in the area of Just Evotec Biologics. The last you have seen is that we reached EUR 850 million. I mean, I think we disclosed that in November. And I think at this moment of time, we are happy to talk about that we reached the EUR 900 million. And we are growing from there. So we will be confident that we stay with our projections for that part of the business, similar as I indicated before, ballpark growth area. I think when it comes to our sales order book, we are also trying to signal today that we are absolutely confident when we look at our full sales pipeline. That's why we have shifted showing that. I mean, that's the pipeline from early stages with low probability all the way to close to confirmed deals.

There, we see double-digit growing demand that gives us confidence to make a qualitative statement on double-digit revenue growth. Yes, the EUR 1 billion with that is inside.

Peter Verdult (Managing Director and Analyst at Citi of European Major Pharmaceuticals.)

Thank you.

Operator (participant)

The next question comes from Naresh Chouhan from Intron Health. Please go ahead.

Naresh Chouhan (Founder)

Hi there. Thanks for taking my questions. Just a follow-up question to Pete, actually, on order book, if I could be a bit more specific. So as I understand it, around 60% of Evotec revenues are not API and ADME-Tox. So the more higher-value-add, longer-term contracts with much better-funded partners. So the biotech issue should be much less of an issue in that part of the business. We're now almost halfway through 2024. Can you give us a sense as to how the order book in that part of your business looks? And should we continue to have you got visibility of growth into 2025 in that part of the business? And that would be very helpful for us to understand what level of confidence and how much visibility you have because, obviously, those contracts are 12-18 months. As they roll off, that business also starts to decline.

Then it's a very different outlook. So some comfort on that would be very helpful. And then secondly, on Just, as I understand it, there were EUR 33 million of revenues from Just in Q4, where the vast majority were in J.Discovery, which means that the J.POD in Seattle is pretty much empty, having been up and running for quite some time. So can you help us understand what's going on and why you have no production in the J.PODs, please? Thank you.

Craig Johnstone (COO)

So thanks, Naresh. I think there's two questions with two clarifications needed. The second one Matthias will take that. The first one, you mentioned 60% of the Evotec business is the non-transactional, which I have to clarify that, first of all, there won't be any Evotec business going forward. And the 60% Laetitia alluded to was really entire Evotec. So 60%, 20% transactional, 20% Just. So I guess that is noting. And we do not split out apart from the information on Just, which has a certain consistency over the recent months and even a year. We do not provide further granularity than that. And on Just.

Matthias Evers (Chief Business Officer)

All right. I will try to clarify a little bit how our Just – Evotec Biologics business actually looks like. And I'm excluding our capabilities on the discovery side. I really focus on the core process development, CMC, clinical supply, commercial manufacturing part. Our value proposition is that we have the ability, with our AI-based models and data streams, to look at antibodies and optimize them for developmentability and manufacturability. Then we have a very strong reputation and track record on the process development side, then to get ready as an antibody for clinical supply, then for commercial supply. So to establish the bookends, no, we don't have a commercial molecule just yet that gives us full leverage of the J.POD capacity.

We have always stated that we are looking at 2026, 2027, so the outer years where we have the commercial molecule, which gives us, of course, higher leverage and higher revenues and higher profitability. At this moment of time, yes, it's not empty because we have clinical supply. For example, for our biotech customers, we work with biotech. We work with DoD. We work with Sandoz. And yes, we have strong leverage of our process development capability because we have a pipeline deal, a tech deal with Sandoz, for instance, where we develop a portfolio of biosimilars. So that hopefully course-corrects a little bit what is empty and what is not. I would rather call it our capacities are rather full and constrained as we are growing into the signed-up work. And we are focusing on process development. And we will get further leverage in the future through commercial production.

Naresh Chouhan (Founder)

Okay. Thank you.

Operator (participant)

The next question comes from Joseph Hedden from RX Securities. Please go ahead.

Joseph Hedden (Equity Analyst of Biotech)

Good afternoon. Thanks for taking my question. It's just on milestones. It was clear that 2023 was a weaker year than 2022 for milestones. And I appreciate that you've never and can't give guidance on levels of expected milestones. But I mean, perhaps just to steer on, you will have an idea on more expected this year from the major partnerships on the innovate side of the pipeline. Could we see a significant uptick there? Thanks.

Matthias Evers (Chief Business Officer)

Laetitia will take that one.

Iris Löw-Friedrich (Chairwoman of the Supervisory Board)

Okay. So regarding the milestones payment, that's obviously not something that is disclosed on a regular basis. What I can share with you is that for 2024 we have anticipated, let's say, a rather moderate year in terms of milestones events based on the early stage of our portfolio. So meaning that I would say, in average, it's in line with what happened, in average, the last three, four years, but in average, so not taking into consideration the peak of 2022 as the reference. So I would say it's a rather prudent contribution we are factoring in our equation this year, to answer your question.

Joseph Hedden (Equity Analyst of Biotech)

Okay. Thank you, Laetitia.

Operator (participant)

The next question comes from Charles Weston from RBC. Please go ahead.

Charles Weston (Managing Director of Healthcare Equity Research)

Hi. Thanks for taking my follow-up. Just one, please, on the Sandoz product development deal. How is that going? How many of the programs have kicked off? What's their progress? Have there been any setbacks? What's the potential revenue phasing for the Sandoz contract over the next few years, please?

Matthias Evers (Chief Business Officer)

Charles, thanks for the follow-up. I can only reiterate what we disclosed previously. I mean, it's a portfolio of molecules that we are starting. We can say I mean, as I said maybe a year ago, we have front-loaded. So all programs are started. So we have front-loaded. So we have multiple molecules projects in parallel. And we have always said as a brunt of the revenues, we talk about multiple years. So it's a multi-year process development. So you have to distribute it in your models over a couple of years.

Charles Weston (Managing Director of Healthcare Equity Research)

Okay. Thank you.

Operator (participant)

There are no further questions at this time. I would hand back for any closing remarks.

Volker Braun (Head of Investor Relations and ESG)

Thank you, Moritz. And thank you to all in the call. We anticipated a somewhat longer Q&A session. I hope you have received satisfying answers. If there's anything left, please feel free to reach out. We are available still today and, obviously, in the coming days, looking forward to the constant exchange of thoughts. Thanks a lot. And speak soon.

Operator (participant)

Ladies and gentlemen, the conference is now concluded. You may disconnect. Thank you for joining. Have a pleasant day. Goodbye.