Evotec SE

XETRA:EVT

Earnings Call Transcript 2019-Q1

[Operator]

Dear ladies and gentlemen, welcome to the Evotec SE conference call regarding the Q1 results 2019. At our customer's request, this conference will be recorded.[Operator Instructions] May I now hand you over to Dr. Werner Lanthaler, who will lead you through this conference. Please go ahead, sir.

[Werner Lanthaler, CEO & Member of Management Board]

Welcome. This is Werner speaking from Evotec. Thank you for dialing into our Q1 quarterly call.We have uploaded a presentation, and we hope that you can follow with this presentation through the discussion of our results together with my management team, which has assembled here in Hamburg. I have Enno Spillner, our CFO with me; I have Craig Johnstone, our COO, with me; and I have Cord Dohrmann, our CSO, with me. When you go to Page #2 of this presentation, we want to first say, welcome and at the same time, we want to say like we do it on the cover page of this presentation, one secret of reaching highly aspirational goals, getting fast-forward and even getting ahead of plans is just get started. And if you get started at the right pace, then you're up for a good year.With this, we are happy to report that we have started 2019 with a strong first quarter and we are also happy that there will be 3 more strong quarters to come in 2019.When you go to Page #4 of this presentation, we can report that the state of play of the company basically reflects strong scientific and operational progress. You see here some bullets of the activities that we, basically, report back to you highlighting that we are at this stage following very consequently our strategy to build a world-leading external innovation platform. Cord and Craig will then bring you closer to the individual events that you see here, but let me on Page #5 for a second reflect what we are doing also in numbers and Enno will then give you more details.But what is clear is that you see a strong financial performance, which, basically, is reflecting with a 20% growth on our top line that the idea of a macro trend, which is just starting is reflected on our platforms from every angle. Translating a fast growth business also into a profitable business, which you see in our EBITDA growth, is, of course, making us extremely happy because that gives us the freedom to invest even more than ever before in breakthrough innovations, which we do in our unpartnered R&D at this stage, which will translate into high-value deals at a latent point on -- alongside our strategy going forward.When you go to Page #6, let me highlight, again, that there is an underlying macro trend of external innovation, which is just starting in drug discovery. This is why we are following a strategy that is consequent and where there is a consistent move forward along the strategy. And this is also why we put our strategy in action plans where you have seen 3 of them already, but there is more to come in the future.With this, I hand over to Enno.

[Enno Spillner, CFO & Member of Management Board]

Thank you, Werner, and welcome, everyone, on the call also from my side. I'm happy to take over to provide very positive Q1 2019 numbers in more detail and confirming that it will take us well on track compared to what was planned and what was guided.Let me start on Page #8. Looking at the group consolidated level, one can observe a 27% uptick in revenues compared to 2019 and I'll come on the next slide into more details regarding revenues and gross margin. So looking at the R&D efforts here right now, the R&D efforts experienced a very significant step up, as indicated already during our last call in March. And please bear in mind that of this EUR 14.4 million R&D total, EUR 8.1 million are considered unpartnered R&D, which means we are significantly more investing into own projects and own platforms to support our long-term sustainability, for example, in the field of metabolic and oncology diseases as well into our iPSC research for instance.For comparison, in Q1 2018, we had invested about EUR 4.6 million at the same time. With regards to SG&A, we are pretty much where we want to be and SG&As are -- costs are growing, but still again like in the previous quarters, under proportionally.Strong growth of the other operating income results from growth in R&D tax credits on the one hand side and reimbursement of our partnered R&D efforts in context of our Lyon ID activities covered by Sanofi. The letter was not yet in place in Q1 2018, as a reminder, and this is also explaining one major part of the step up of other operating income in 2019. As a result of the just described, Evotec shows more than doubling in adjusted EBITDA. And furthermore, this positive development is supported by a first time EUR 3.1 million positive impact through first time application of IFRS 16.Moving to Page #9. Obviously, the positive revenue growth trend observed in the past years could be continued in Q1 of this year. As you can see, this increase was mainly triggered by solid growth of the base business and strong milestone achievements in the Execute and the Innovate segment. For example, from Bayer and from Boehringer Ingelheim. This growth of the base business is of almost 19% and is almost in the same ballpark, in the same range, as we saw it in the previous full 2018 average numbers. These 2 positive revenue effects, plus some favorable FX effect wins, which are triggering about 1.5 % in our margin, have increasing our gross margin significantly by 7.9 % to now 30.5%. To be noted that also without positive impact of the milestones, we can see a positive development of our gross margin.Slide #10. Good news on both segments, Execute and Innovate. Execute revenues increased by almost 28% compared against Q1 2018, and Innovate is even up over 80% when compared against the same period of the previous year. The significant R&D efforts increased to EUR 16.3 million compared to EUR 5.6 million in the Innovate segment in Q1 2018. And this is, again, a split of an increase in the unpartnered R&D and as described before, a new in Q1 2019, the partnered R&D of an amount of EUR 6.3 million.One reason explaining the strong upswing of other operating income, obviously, the reimbursement of the R&D cost, as I just mentioned by Sanofi. The Execute EBITDA almost doubled compared to Q1 2018, while Innovate improved, but remains slightly negative compared also to 2018 Q1.Slide #11 is a little bit the exemption from the rule, which I will only apply in this quarter. Due to the significant impact through first time application of IFRS 16, I would like to draw your attention to few non-P&L numbers, but focusing on balance sheet and cash flow. Balance sheet total went up almost EUR 110 million to a strong EUR 881 million at the end of Q1 of this year for the reasons described on the slide, however, the major impact being triggered by first time application of IFRS 16, which is namely an increase in property, plant and equipment, following the capitalization of operating leases as now fixed assets according to the new rules and affected loans and finance leases, which are affected significantly by this new measure. Beyond that, Evotec continues to maintain a conservative net debt of -- ratio of roughly 0.8%. And we also maintained a strong equity ratio of 51% compared to 55% at the end of last year and maintaining a strong liquidity position of EUR 141.6 million at the end of Q1 2019. So overall, presenting a very solid balance sheet and a very strong cash position.And with having said that, I would like to hand over to Craig to introduce the Execute part.

[Craig Johnstone, COO & Member of Management Board]

Thank you, Enno, and good afternoon to everyone on the call from me. Together Cord and I will update you on the key aspects of the scientific and operational performance in Q1. On Page 13, this diagram simply serves as a reminder of our blended business model through which we offer access to our scientific excellence and create value for our partners and ourselves through a range of business models whether it's through fee-for-service, or FTE models or indeed by means of advancing technologies and assets internally for partnering later, it's our intention to build up a broad and valuable portfolio of co-owned projects which are built-in quality for survivability and success through the development process.On the next slide, Page 14, we see that the strong financial performance in Q1 already detailed by Enno has been underpinned by a very strong quarter of scientific project -- progress in major partnerships. By leveraging all our scientific know-how and experience, coupled with advanced technologies, predictive science, machine learning, AI and short cycle times, we drive the highest probability of success in all our projects. Successful in moving projects rapidly through the drug discovery and development process, typically drives not only extensions of existing contracts, but often expansion of these partnerships to engage a wider breadth of resources and capabilities. The course integration of all these capabilities under 1 Evotec roof enables us to provide our partners with high flexibility as well as quality throughout whatever the project needs. Thus, all parts of the business, Evotec, Cyprotex and Aptuit, often working together, have all performed well in this quarter. As ever, we continue to monitor operational efficiency and optimize our infrastructure. We have decided to consolidate our small molecule high-throughput screening site in Basel with our Toulouse operations. Over the coming months, the business will transition to Toulouse with greater critical mass and co-location of screening and compound management, offers optimal efficiency of operation. And of course, we'd like to be offering support to our 15 affected colleagues there.Pleasingly, but also witnessing a steady flow of projects moving from the Evotec discovery infrastructure into INDiGO, which provides enormous savings of time and complexity for our partners at this very critical stage of a drug's life cycle. As a result, and as you see on Page 15, we continue to see a very high return rate -- over 90% -- of our broad and global customer base. Perhaps a couple of noteworthy details here. Today, we work with 19 of the top 20 pharma, while at the same time we create large long-term strategic partnerships, also with foundations, such as CHDI and many biotech companies around the world, Carna, Tesaro, Abivax, to name just a few.With that, I hand over the next part to Cord.

[Cord Dohrmann]

Thank you, Craig, and good afternoon to everybody on the call. After a very successful year in 2018, Evotec Innovate continues with a strong start into 2019. In the first quarter of 2019, we have already achieved a number of milestones. Most importantly, we have further progressed our partner product pipeline. We added, for example, Galapagos to our long list of partners in a fibrosis-focused partnership, in the anti-infective field, we forged alliances with the Helmholtz Institute for infectious diseases and GARDP, a global antibiotic research organization. And furthermore, we added 2 strategic partnerships in oncology, one with Indivumed in colorectal cancer and another one with the Mark Foundation in immuno-oncology.On the next page, Page 17, you can see that we are well on our way to further broaden and deepen our partner product pipeline. Overall, we have already added 5 new partnerships and at the same time keep progressing projects on a very broad front. We are very excited about advances in clinical development. Here, we already reported 2 clinical starts, one in chronic cough through our partnership with Bayer and another one in NASH through our partner, Second Genome. Unfortunately, not everything is always progressing as planned. So we were recently informed by our partner, Second Genome, that the NASH trial was put on hold. Although this is unfortunate, this really exemplifies the strength of our Evotec Innovate strategy having built and continuing to build a very broad pipeline of co-owned projects, one project not moving forward is a setback, but is clearly not the end of the world.In this respect, we're very much looking forward to Phase II results in chronic cough this summer and hopefully further clinical starts before the end of the year.With the following page, Page 18, we would like to remind you that we continue our efforts to redefine the drug discovery paradigm through focusing on patient-centric approaches. And to this put some of the more recent deals in context. Pursuing patient-centric approaches really starts with the better understanding of the disease and the disease-related processes. This can be achieved by extensive profiling of individual patients over time and in particular conducting molecular profiling through Omics approaches, such as genomics, transcriptomics and proteomics. Accessing clinical patient records and combining these comprehensive molecular profiles through Omics data sets provides new insights into molecular disease processes, which can then be targeted with interventional therapies. In the past, we had already made investments into accessing patient data at a larger scale like, for example, through our NURTuRE consortium in chronic kidney disease and the most recent collaboration with Indivumed aimed at a similar approach, this time just in colorectal cancer.As you can see on Page 19, Indivumed is a company focused on establishing bio banks in the field of oncology. We decided to join forces with Indivumed in the field of colorectal cancer where they have assembled one of the most comprehensive collections of patient samples and have already established molecular profiles using a comprehensive Omics approach. Together with Indivumed we will analyze these data sets to select novel mechanisms and targets in order to bring them forward into drug discovery programs.As we are discussing patient-centric approaches, I would like to briefly give you an update on our NURTuRE initiative on Page 20. We are continuing to invest in -- through the generation of molecular profiles database for kidney diseases based on the NURTuRE consortium. This project has made great progress in that we were able to demonstrate that molecular profiles are very useful in the stratification of patient population, the validation of targets and biomarkers and generally, the program is generating an increased interest in the industry.On the next page, Page 21, I would also like to briefly update you on our iPSC-based drug discovery platform. Once we have generated patient-derived molecular disease profiles, the next step is to move these forward into in-vitro models. Moving this forward, our iPSC-based drug discovery platform is ideally suited to develop patient derived cell-based disease models for screening into lead and lead off campaigns.As you can see on Page 22, here, we are not only continuing to make progress in our partnerships with Sanofi in diabetes and Celgene in neurodegeneration but also in establishing further cell types. Most recently, we have built a microglia platform, which allows us to generate human microglia at high-throughput for screening purposes. This is a great progress as microglia are thought to be highly relevant for many CNS-borne diseases and will open doors for many more project-focused approaches in microglia, including neurodegeneration, neuro developmental disorders and neuroinflammation. So in conclusion, all in all, we've had a very strong start into 2019 for Evotec Innovate and expect to continue on this path going forward.With this, I'd like to thank you for your attention and hand over to Werner.

[Werner Lanthaler, CEO & Member of Management Board]

Thank you so much. When you go to Page 24, let's round up. It's about getting started, but for us, it's about creating a long-term consistent strategy. And with this, we are well on our way for a strong 2019. With this, we confirm comfortably our guidance for 2019 by basically growing about 10% on our group revenues, by growing about 10% on our adjusted EBITDA and keeping our unpartnered R&D expenses at between EUR 30 million and EUR 40 million, which is the highest investment that we have ever done in the history of the company to create long-term partner built projects out of these R&D investments.On the last page, you see important dates coming up. And with this, let us thank you for following Evotec from quarter-to-quarter and growing together with us. Thank you so much. We are open for questions.

[Operator]

[Operator Instructions] The first question is from Samir Devani, Rx Securities.

[Samir Devani, Research Analyst]

Congrats on another good quarter. I've just got a couple, just on the Second Genome project. Just wondering have you got any other backup P2X7 inhibitors that you're working on with Second Genome or anywhere else in the portfolio, that's the first question. And then just within the statement, you talk about a seasonal high cash outflow. I'm just wondering if you could just perhaps provide a little bit more color on that because it's not apparent, certainly to me, in the other sort of Q1 2018 and '17 that we're seeing that, so perhaps you could just give us a bit more detail on that.

[Werner Lanthaler, CEO & Member of Management Board]

Thank you, Samir, for your question. So on P2X7, yes, there are other P2X7 projects in our portfolio, but not together with Second Genome. So that's the answer to your first question. And on the cash outflow, I hand back to Enno.

[Enno Spillner, CFO & Member of Management Board]

Yes, pleasure, Samir. So at the end of 2018, we had a cash position of roughly EUR 149 million, which then to the end of Q1 reduced to EUR 142 million. So not a huge change. However, in the meantime, paying back another EUR 15 million of debt of our Deutsche Bank bridge loan out of the Aptuit acquisition in Q1 and another EUR 15 million immediately after closing of Q1 completely winding this loan down driving in fact to 0, so in that regard, I think, there have not been any major changes with the exception of having twice payback of this loan.

[Operator]

The next question is from Brigitte de Lima, goetzpartners.

[Brigitte Denise de Lima, Analyst]

I'll ask 3 questions, if I may. So the first one is maybe just some clarity on the Innovate revenues. Just really to understand, I mean, the number's very high to start with. It's a very strong result for the Innovate business. And then how do we -- how can we understand what the revenue, what the balance is if we take on one side the milestones you disclosed, what was the rest of the revenues related to? And that would, I think, help us understand. The second would be on the Indivumed collaboration. I'm just wondering how it's actually structured from a financial point of view without asking for specifics, but do the companies both invest in working on something and then if Evotec develops a molecule, Indivumed retains some sort of royalty? And then the last question would be on the Bayer chronic cough. There's now 2 programs in Phase II. And I'm just curious to understand how these 2 molecules differ in terms of the chemical series they come from? Do they have the same target as the expectation that they would be positioned in different ways? Or is it a way for Bayer to reduce the risk to make sure that at least one of those will eventually go the way through development?

[Werner Lanthaler, CEO & Member of Management Board]

Maybe starting with your third first question because the second question will go to Cord, the first question will go to Enno. The philosophy behind all our large partnerships is to create a portfolio of options to basically master a disease. And that's what we are doing also in the field of endometriosis like we do it in chronic cough together with Bayer. So you should assume that there are different molecules coming from different chemical series in different mechanisms where we always try to go through 1 bottleneck, which very often is a predictive model. And then we say, okay, if there are 2 compounds and we tried with 2 compounds to see which one ultimately is better serving the indication. Then, as you also know, many indications have different ways of treatments within the indication. That's at this stage too early to tell and unclear and that's the reason why we are in these indications together with our partners in the large collaborations like Celgene neurodegeneration or Bayer in endometriosis and cough going here from multiple options. At the end, of course, you will be happy if you have 1 compound going into a large Phase III because that's where the cost of running a Phase III, ultimately, then have to be taken into consideration and account, but that's just the philosophy behind the P2X3s that you see in this collaboration. And also an important guidance point, we expect from these ongoing Phase IIs by the end of 2019 the first data points, which I think, then also guides us very nicely into a potentially royalty coming out of these projects hopefully. Question #2 goes back to Cord on the Indivumed partnership.

[Cord Dohrmann]

Thank you for your question. So the Indivumed partnership is in line with many other partnerships that we have structured with academia and smaller partners. Here, essentially, Indivumed invested heavily already into the collection of patient-derived colorectal samples and the characterization of these samples via a PanOmics approach. And here now, at this point in time, we are coming in to help analyze these data sets and identify novel targets and mechanisms to pursue and bring them forward into drug discovery programs. Here, primarily, Evotec will invest in these steps going forward and Indivumed will participate in royalty rate from whatever we will, ultimately, when we commercialize what we will -- what Evotec will be getting, they will get a share depending a little bit on how much we have actually invested before the partnership is signed.

[Werner Lanthaler, CEO & Member of Management Board]

Thank you. Question #1 goes back to Enno.

[Enno Spillner, CFO & Member of Management Board]

Yes. Coming back to the segment revenues of Innovate, which indeed increased at about 80%, as I described before. And this is a mix of an increase in the field of milestones, up-fronts and licenses, which if you take a look at that part is about tripling compared to Q1 2018. That said, 2018 was relatively low in that regard. And then it's also in the normal course of business, just growing our collaborations. And just here as one example, the Celgene onco deal was struck last year in Q2 and was not in as a comparison in Q1 of 2018. And these large collaborations, of course, make a significant difference compared to the previous year.

[Werner Lanthaler, CEO & Member of Management Board]

Does this answer your question?

[Brigitte Denise de Lima, Analyst]

Yes, mostly. I'm still a bit puzzled about Innovate because my understanding was it is mainly milestones, deferred revenue and licensing revenue. So the Celgene onco deal, is that -- are we talking about deferred revenue? Or is that some -- or is it an ongoing license fee that they are paying you or what exactly are we looking at there? I'm just really trying to get to what's in there apart from the milestones that we heard about?

[Enno Spillner, CFO & Member of Management Board]

Well, you have just a normal collaboration ongoing where we have received the cash in already in May of last year. And now it's being deferred over the period of the collaboration triggering revenues over the quarters that we are working in.

[Brigitte Denise de Lima, Analyst]

Okay. So it was the differed revenue. That's what is asked. Thank you very much indeed. Very clear.

[Operator]

The next question is from Michael Higgins, Ladenburg.

[Michael John Higgins]

Congratulations guys on the continued execution. Couple of questions, if we could. Regarding the unpartnered R&D, how do they compare to the partnered R&D expenses for the quarter? And also on the unpartnered iPSC expenses, is that work that's conducted on a partnered program or work towards reaching other iPSC collaboration agreements?

[Werner Lanthaler, CEO & Member of Management Board]

Welcome to New York City. Hi, Michael. Maybe first on the iPSC platform because that's simple. Everything that at this stage is partnered is within the partnerships that you see out of the Celgene neurodegeneration partnership or within the Sanofi data set collaboration. All the rest of our R&D investments is at this stage in unpartnered protocols out of the iPSC platform. If you would want to give this a number, it's somewhere between 5 or probably even a larger number of ongoing larger projects within this platform that we are preparing here for future partnering, which can be in the next 2 to 3 years. On R&D overall, I hand back to Enno.

[Enno Spillner, CFO & Member of Management Board]

So out of the split where the total was EUR 14.4 million, the partnered R&D is about EUR 6.3 million. So that's the part that is being reimbursed by Sanofi and other operating income. And then, logically, about EUR 8.1 million is the part that is unpartnered. So that is the efforts into our own platforms and product candidate.

[Werner Lanthaler, CEO & Member of Management Board]

Does this answer your questions, Michael?

[Michael John Higgins]

Yes. That's very helpful. If I could ask one more. I'm trying to understand the consolidation of Basel activities into Toulouse site. How many employees do you have there now? What programs are being worked on there? And how has this changed since the Sanofi agreement?

[Werner Lanthaler, CEO & Member of Management Board]

So maybe Craig is -- as he is the site head of Toulouse, the best to give you information about the Toulouse site.

[Craig Johnstone, COO & Member of Management Board]

Sure. So thanks for the question, Michael. So today, Evotec is operating 3 high-throughput screening centers, you will understand the business is very intensive, investment-intensive and so on. And the Basel site was brought into Evotec as part of the acquisition of Aptuit. So what we're doing is consolidating the work from Basel into Toulouse where we have co-location of both a very broad and large high-throughput screening facility, alongside very important compound management, compound dispensing capability. And these work together in tandem to optimize the efficiency of high-throughput screening and [ Hit ] finding operations. So we've decided to move the work from Basel to Toulouse and bring to an end the operations in the Basel site around quarter 3 of this year. It affects 15 members of staff.

[Werner Lanthaler, CEO & Member of Management Board]

Which are invited to go to any other site. That's one additional information. The other information is that when you look at Toulouse, we took over Toulouse in 2014 with 208 staff. And by the middle of 2019, we will be above 480 people who are operating in our Toulouse site now, which makes this in itself a highly productive, a highly efficient and a great site where we continue to grow because the footprint and the capacity available in Toulouse is there because the site was built for even larger capacities in the past. And the other point about Toulouse is that France for us is an excellent recruitment ground because the scientific talent and cost that we can attract in France to Toulouse is outstanding and as we are one of the faster-growing companies in the field of life science in the South of France, we are highly attractive employer in that region, so that's why many, many positives are coming together in Toulouse for us.

[Michael John Higgins]

Okay. That's very, very helpful. Yes, no that's great. And then just 1 brief follow-up, if I could, is the potential expansion that you could incur organically inside that Toulouse facility. You're about 480-or-so now, how many employees and how much operationally could you expand to there?

[Werner Lanthaler, CEO & Member of Management Board]

So at this stage, we are growing at every site within the footprint of Evotec, I think that's an important message as well. We are growing, for example, very strongly in our Verona site. We are growing very strongly in our German sites. We are growing very, very strongly in our U.S. operations. And of course, we are also growing massively in our Manchester, in our Abingdon operations in the U.K. The capacity limitation for Toulouse is something where, again, this is a former pharma site, which was hosting more than 1,000 people on that site, so there would be enough capacity and space to grow. That's not limiting organically at this stage the growth of the Toulouse site.

[Operator]

The next question is from Victoria English, Evernow Publishing.

[Victoria English]

I have 2 questions. The first concerns your activity in the area of antibiotic. Cord quickly mentioned that in connection with the infectious. I think it was a consortium group that you're working with. If you could just tell us a little about what you're contributing to that? And the second question concerns the microglia, the comments about the iPSCs and what could be done here in understanding CNS diseases. The question is whether this has application to Alzheimer's and a sub-question to early stage Alzheimer's. And the reason I mention this is that SI has just started or set up an agreement to work with a number of U.S. institutions to try to work on early stage, an indication for the 2 drugs that it's taking through Phase III.

[Werner Lanthaler, CEO & Member of Management Board]

Thank you very much. Hello, Victoria, both questions, I direct to Cord.

[Cord Dohrmann]

Victoria, I'm sorry, I'm not quite sure if I got the antibiotics question 100%.

[Werner Lanthaler, CEO & Member of Management Board]

What are we doing.

[Victoria English]

What are you doing? That's all.

[Cord Dohrmann]

More generally speaking what are we doing. So we have a number of ongoing projects in the antibiotic field. And constantly, we are trying to grow this portfolio going forward. We have built, for example, and announced partnership with the Helmholtz Centre here on a new class of natural products that have broad spectrum activity on microbes, in particular, also multidrug resistance microbes. So we are highly excited about this. This could lead to whole platform of new potential first-in-class antibiotics. And we are currently evaluating further opportunities to expand the portfolio here. And, I think, that's all I can say at this point in time about the antibiotics franchise. When it comes to microglia, microglia is a cell type that is thought to be of high relevance to many CNS-borne diseases. And it has just been very difficult to access because it hasn't been possible to derive human microglia and in-vitro and use them for screening purposes. Microglia, as you mentioned, is clearly relevant for neurodegenerative diseases, including Alzheimer's disease and here, in particular, the neuro inflammation angle is an angle that is of great excitement, but it's also highly relevant to neuro development disorders and other neurological diseases, which are not in the scope of the Celgene collaboration. So it's -- this is also why I called it a platform because it really can be leveraged in all sorts of directions and we are just very excited about having been able to put this platform in place and making it work and now we will try to explore it going forward.

[Operator]

The next question is from Naresh Chouhan from Intrinsic Health.

[Naresh Chouhan, Founder]

I have a few questions, please. Can you give us some sense as to the size of the milestones and that you negotiated on some of the more recent partnerships in Execute -- in Innovate, sorry, Obviously there has been a number of new clinical starts. How should we be thinking about the size of any potential milestones relative to what we've seen in the past? And then, last year, we saw you spend more money on R&D as your revenues surpassed your net of expectations for the year. This year, it looks like we could be in a similar position from a revenue perspective. And so philosophically, do you see the need to accelerate some programs or invest more heavily in 2019? And then, I have a couple more if I can come back.

[Werner Lanthaler, CEO & Member of Management Board]

So I think, the first on the design of our partnerships, I think, here on our milestone and co-ownership-driven partnerships, you should see that, of course, it always comes down to what's this -- what's the first-in-class situation of certain targets that we are partnering, what's the competitive situation. So there is an Individual life behind every contract of our 100 co-owned Innovate projects. The average number of milestones is around 200 million milestones per co-owned project. That's the first thing. The average number of royalties that is behind every of these partnerships is on average 8%. Coming to your specific question, how does this look in the recent years compared to if we look now 5 years back, it also comes here down to where does the partnership originate from. If, for example a partnership originates from our iPSC platform, at this stage, we have always been able to negotiate double-digit royalties and milestones that are significantly higher than the 200 million that I have just described as an average. And that's, I think a pattern where again it comes down to what's the first-in-class potential and what's the platform in the competitive situation that we can bring together into a partnership for these type of transactions. When it comes to our R&D "need" going forward that's the way I interpret your question. I think, here, you should see that, for us, it's not driven by how much R&D do we want to spend or can we spend. It's really driven by what project is exciting us and where do we see a first-in-class opportunity to invest in. And that's, I think, a situation where we are at this stage not able to invest in everything that is exciting us because of capacity limitations. And that's also why we are planning here for the very long run because many of the things will just not go away in drug discovery in this year or next year or the year after. We are at the beginning of our R&D efforts in drug discovery because we are at the beginning of curing or going to cure of certain disease areas and that's why limiting this to the view of 1 year is probably not enough to look at and that's why it is such a great situation to have a profitable company going forward. So that we - that's why we are "capital markets" independently able to tailor our R&D investments on the platform. Sorry for a philosophical answer on that question, but that's really how we operate.

[Naresh Chouhan, Founder]

Okay. And then a couple more just following on from the -- are there any programs derived from the iPSC platform that are nearing entering the clinic that could help us validate the platform? And then you've -- on the -- and then following on the iPSC platform, we've -- it is clearly a very exciting technology, but we haven't seen any major new partnerships for a while. Is that because you're still working on things like the microglia work? Or is it that the 2 most obvious applications, the ones that Sanofi and Celgene have signed up and therefore you've got anti-compete clauses that prevents you signing new deals? Just some kind of insights to where that platform is going, and what the opportunity is in the kind of near-to-medium term would be helpful.

[Werner Lanthaler, CEO & Member of Management Board]

So I think, to your second part of the question, nothing would hold us back given the existing partnerships to sign new partnerships. I can also disclose that there's enough interest in the markets to make new partnerships with us. There is more excitement than ever on our iPSC platform for the projects that we are bringing forward here. Having said that, we are just value optimizing here by sometimes investing a bit more in kick-starting the project, building on the platform making them even more robust than we have been able to do this in the past. So that's why not signing new iPSC deals, I think, is a good sign, and it's not a sign of not the availability of partnerships here. And on your first question, we will report once we are there in the clinic and all I can say at this stage that the portfolio of targets nearing the clinic out of both collaborations, the beta cell collaboration, but also the neurodegenerative collaboration looks good. And at the same time, I trust on when I make here specific guidance to specific dates.

[Naresh Chouhan, Founder]

Can I just sneak one more in, which is on the margin guidance. You've kept your margin guidance the same despite the currency tailwind on the gross margin. So should we expect these currency tailwinds to ease through the year and therefore kind of expect a slightly weaker margin as we go through the year?

[Werner Lanthaler, CEO & Member of Management Board]

We are unfortunately or fortunately not in the situation to predict where currencies will go, but, I think, the good situation in Evotec is that there is kind of a natural hedge in the company. So we have a cost base in the U.S., we have a cost base in Europe, we have a cost base in the U.K. So there are 3 currencies affected by that. We have a revenue base coming out of the U.S., increasingly coming out of the U.S., increasingly signed up in U.S. dollars and we have a cost base in Europe, but that's why there's a natural hedge, that's why our exposure overall to FX is kind of limited. Having said that, we then use all tools to get the smoothening of the FX into our P&L and again, that's I think daily bread and butter for our finance teams here to optimize that.

[Operator]

The next question is from Francesco Gregori, Trinity Delta.

[Francesco Gregori, Research Analyst]

Let me ask you a provocative question. Your revenues are rising, your margins are expanding, your cash flows are very solid. Your debt position is very controlled. Is it time to stop paying dividends?

[Werner Lanthaler, CEO & Member of Management Board]

It's actually a technical situation where given the loss carried forward that our -- in our group at this stage are still existing. So therefore, technically, we are not and legally, we are not allowed to pay dividends. Having said that, that's a situation, which we -- which will come, which is fantastic for a company to have the optionality to think about these things, especially for biotech companies because, as you know, there are 4,400 biotech companies out there. Less than 2% of them are profitable, and we are one of them. Having said that, the synchronization that we want to get with our shareholders and investors is that we want to dividend in our Innovate segment because, here, the value creation is disproportionally higher than by dividend out on short-term cash dividend that we would give at this stage of the company. That's the long-term potential that we see arising from the platform. Having said that, it's a fantastic situation to also being able to not only on an abstract level, but in a very specific long-term plan also to think about cash dividends in the long-term future.

[Operator]

We have a follow-up question of Brigitte de Lima, goetzpartners.

[Brigitte Denise de Lima, Analyst]

Just one question. And I noticed that the revenue coming from biotech now stands at 46%, which I think is the highest at least I can see in my model. So I think it's sort of quite telling of the broader environment that it's really biotech that seems to be outsourcing and potentially also increasing their spend the most, but is this now -- has this group now firmly become your largest customer group going forward as well? Or was it a one-off? And if biotech is now firmly your biggest customer group, does that change the sort of, how would you say, average structure of the contract duration, are these sort of long-term clients or is it more piecemeal, does it make the business here harder to manage or is it a very positive signal that you're having to cater it to more and more biotech's.

[Werner Lanthaler, CEO & Member of Management Board]

I think it's a situation where, ultimately, the idea of virtualization and capital elasticity will drive all of our partners. Of course, the group that is here standing out is virtual biotechs especially coming from the East Coast of the United States where you have a very good funding environment for the last years, which will also drive our long-term growth here. But again having said that, we see for all institutions that do drug discovery, a trend towards virtualization and using companies like Evotec in partnership with them. The other thing that I want to highlight here is it's not biotech's only. Let me stress the importance of foundations in our business model going forward and just going back here between 5 or 10 years, foundations did not exist as active players in the drug discovery. Well, now, this year, we will make significant revenues with foundations where you see an element of virtualization really in its best practice because you come from the patient, have money that is on the drug discovery platform, immediately put to work, and then goes back on to clinical platforms and allows many, many foundations to get into the market. Just to give you here a number, there are more than 400 patient foundations out there who want to definitely do something in their mission and that includes also drug discovery work. That's also just starting as a process. And here, a platform like Evotec is ideally suited for this customer type. So yes, biotech is growing also given the business mix that we are creating through our Aptuit acquisition, which we brought in 2 years ago, because here we are providing, for example, INDiGO. So matching into a clinical trial packages, which are, of course, ideally suited for this kind of customers and that's why you see biotech's growing, you will see foundations growing and you will also see an increased virtualization and capital elasticity driven pharma market. Sorry for a long answer to a short question, but yes, we love biotech.

[Operator]

At the moment, there are no further questions. [Operator Instructions]

[Werner Lanthaler, CEO & Member of Management Board]

If there no further questions, let me thank you again. It is our pleasure to work for our partners. It is our pleasure to drive R&D forward and it's also our pleasure to serve our long-term shareholders who build Evotec together with us. Thank you so much.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.