E

Evotec SE
XETRA:EVT

Watchlist Manager
Evotec SE
XETRA:EVT
Watchlist
Price: 8.46 EUR -5.1% Market Closed
Market Cap: 1.5B EUR
Have any thoughts about
Evotec SE?
Write Note

Earnings Call Transcript

Earnings Call Transcript
2022-Q1

from 0
Operator

Dear ladies and gentlemen, welcome to the conference call of Evotec SE. At our customers' request, this conference will be recorded. [Operator Instructions]

May I now hand you over to Werner Lanthaler from Evotec, who will lead you through this conference.

W
Werner Lanthaler
executive

Welcome to our Q1 quarterly call to Evotec. It's great to welcome you on the R&D Autobahn to Cures, where we are landing and expanding and setting the pace for drug discovery and development. We have uploaded a presentation for this call, and you will always find this presentation on our website and now on the web page to follow.

If you go to Page #2 of this presentation, you can see that I'm here together with my team, and I'm especially happy that our new CBO, Matthias Evers, has joined the team and let us warmly welcome him in this crowd as well. I'm here together with Enno, our CFO; our COO, Craig; and our CSO, Cord, who within this call, also bring a bit more color and deeper understanding to the yesterday announced extension and expansion of our landmark partnership in targeted protein degradation with BMS.

With this, a short intro from Matthias, I think, is also appropriate for all of you. And with this, I hand over to Matthias.

E
EnnoSpillner
executive

Thank you very much, Werner and very happy to. You asked me the rationale for joining Evotec, and from my point of view, it's very simple. As a scientist by heart and having now co-led R&D for Pharma and Bio-Tech globally at McKinsey & Company over the last 20 years, I'm drawn to Evotec for multiple reasons. I see the strong science capabilities, a very collaborative approach to build a shared R&D economy and a very strong can-do culture with focus on excellence. And also a bit more specifically, I've invested a lot of time and research to explore the convergence between science and technology. And with the new function now bringing together business development, technology, and strategy; I think Evotec is perfect place to deliver on this promise. It's really an honor to be here on the team as everyone. I believe Evotec is trust at the beginning. So I couldn't simply be more excited. So Werner, let me give it back to you.

W
Werner Lanthaler
executive

Thank you so much. When it comes to the beginning, let's please go to Page #5 of this presentation, and you will see that we had a great start and a strong performance in all building blocks of the company in Q1 2022.

Just a few highlights here. You see strong momentum in business buildup in all lines. We have announced collaboration with Boehringer Ingelheim on our induced pluripotent stem cells platform. We have announced a new collaboration with Eli Lilly on our molecular patient databases in metabolic diseases. We have launched the broader initiative around molecular patient databases, which you will hear a lot from in the future. Our co-owned pipeline is progressing in multiple areas. We have received a grant from the German authorities to develop our clinical program in multiple viral diseases forward. You have seen strong progress in our ongoing neuroscience collaboration with BMS, and you have yesterday seen that we have landed a fantastic deal in targeted protein degradation with BMS.

When it comes to our equity portfolio, we have made new investments into Centauri, IMIDomics, & Tubulis, which just shows you that co-ownership for us is a strategic endeavor that will never stop as long as not all diseases are cured. We're also very happy to report back to you that our Just-Evotec Biologics business line is performing very well, and we are very happy with the transition from a construction site last year to a site where we are already producing materials as we speak, and Craig can tell you more about this later.

When you go on Page forward and you look at our numbers, we are very happy that we can confirm our guidance in a very comfortable way. And our guidance shows you not only that the group revenues in first quarter went up by 24%, but also that we will grow this year up to EUR 700 million to EUR 720 million on the top line. Our guidance also shows you that we are accelerating our R&D investments to EUR 70 million to EUR 80 million this year. And these are the investments that we first make to then bring back transactions like, for example, our targeted protein degradation deal with BMS. So watch out for more to come here because leveraging our R&D investments into long-term value is exactly our strategy.

And when it comes to our EBITDA, we are very happy to report a profitable first quarter, which is totally in line with our expectations. And we are expecting here EUR 105 million to EUR 120 million in EBITDA this year. So guidance is fully confirmed and very confidently confirmed at this moment in time. When you go forward, Enno will now bring you into our Q1 numbers in more detail. And with this, I hand over and say thank you from my side first.

E
EnnoSpillner
executive

Yes. Thank you, Werner, and a warm welcome also from my side to everyone. It's a great pleasure having here on the call today for our Q1 update. Starting with the general overlook, 3 months 2022 numbers show an excellent 24% increase on our revenue line, as Werner just indicated already. And this growth was observed in all business areas. The gross margin amounted to 19.6% below last year's 23%. I'll come back to that on the next page. Group R&D expenses remained constant with EUR 18.1 million. Thereof, unpartnered R&D expenses increased various partnered R&D expenses decreased. The R&D spend in Q1 was focused on enhancing our multiple platforms and the continued acceleration of our co-owned pipeline.

The increase of roughly EUR 10 million of 49% in SG&A expenses versus last year was mainly attributable to the recruitment of personnel to support the overall business growth and by cost for our secondary NASDAQ U.S. listing, which we closed last year. Furthermore, the capacity expansion resulted in higher depreciation of facilities in particular, related to the already before mentioned J.POD in Redmond U.S., and rising energy prices also made an impact in Q1 2022. The other operating income and expenses increased by EUR 2 million and continued to be driven by tax credits and ideally related reimbursement from Sanofi. Main reason for the increased income were tax credits in Toulouse, France and reestablished tax credits in Italy, which could be claimed from June 2021 onwards again and hence had no income or no comparison in Q1 2021.

With a total of EUR 18.9 million, our adjusted EBITDA lands within our expectations, but slightly below last year's EUR 21 million. Also, when looking at the phasing over the last year in the past, this is in line with our guidance. For Q1 2022, we also report a net loss of EUR 73.2 million, which was influenced by the fair value adjustments in our equity investment in Exscientia due to their recent share price development.

Slide 9 depicts our strong revenue growth of 24% overall, which was spread across all business areas, as I mentioned before, recognizing some FX tailwinds at constant FX rates, year-on-year revenues would have increased by 19%. Important to note is once again the strong growth of our base business growing at a rate of 25%. The gross margin decreased versus last year resulted mainly from investing in our precision medicine platforms and the continuous ramp-up of our J.POD facilities in the U.S. and in France as well as significantly higher depreciations due to the continued capacity expansions. Total gross margin, excluding Just Biologics, would have reached 27% versus 23% during the same period of the last year.

Coming to Page 10. As indicated before, all the segments continue to grow and perform well, reflecting the broad basis of our goal. Year-to-date, Execute revenues, including intersegment revenues grew 27% to EUR 175 million in Q1 2022. This is further driven by an increase in demand for integrated offers and the strong demand for the base business. The adjusted EBITDA of Evotec Execute improved by 14% to EUR 32 million. On the other side, 3 months 2022 Innovate revenues amounted to EUR 36 million, excellent, also 27% above last year due to continuous high demand for precision medicine, reflected by extended existing as well as several new partnerships and despite lack of milestones in Q1 2022. Innovate's total R&D amounted to EUR 21.2 million, which is 17% above last year, underlining our continued investment and commitment into innovation projects and long-term sustainability. As expected, the adjusted EBITDA of Evotec Innovate remained negative with EUR 13.4 million.

Slide 11 summarizes Evotec's very solid and sustainable non-P&L related financial KPIs. And here, the balance sheet contraction resulted mainly from the revaluation of Exscientia in Q1. Trade accounts receivable decreased by EUR 36 million due to EUR 40 million of milestone and prepayments cashed in during Q1, mainly related to our BMS Celgene collaborations. This improved our DSO or days sales outstanding figure for Q1 2022 to 55 days, which then again is within the corridor that we aim for moving between 50 and 60 days. The equity ratio remained at a very solid 60% and we can report a net cash position of EUR 490 million. And these factors together indicate plenty of headroom and flexibility to further invest into organic as well as strategic growth if need be.

Total liquidity was nearly unchanged to year-end with EUR 855 million, and this allows us to continue planned CapEx investment to support growth projects as well as general expansion of our capacities across all sites. Furthermore, we continue to plan to invest into our equity engagement, existing ones and new ones as Werner mentioned also before. And with that, I'm completing the financial part of the overview for today and hand back to Werner. Thank you very much.

W
Werner Lanthaler
executive

Thank you, Enno. If you go to Page 13 of this presentation, let me introduce you to the section that Cord will then take over. Let me, at the same time, guide you to our Capital Markets Day presentation, which you find online, where we typically layout a scientific section that we then transform into a business segment or into multiple business deals, where today, we will introduce you to targeted protein degradation in a deeper guidance.

And when you come to the underlying principle of our growth strategy when it comes to transforming client into business, the principle is very simple: do outstanding work and you will grow with your partners. That's what we are doing, and that's the principle that we are following. So it's not a coincident when we are landing and expanding with our partners. It is simply the function of outstanding work that is performed on our platform every day. This is a big thank you to the whole platform and all the teams that are collaborating to make this such a well-performing platform. So it's not only our deal that we struck with Lilly, it's not only the deal with Boehringer, also what we have just done with BMS that is testament for that.

And with this, let me hand over to Cord to bring you deeper into targeted protein degradation.

C
Cord Dohrmann
executive

Thank you, Werner, and good morning and good afternoon to everybody on the call. Today, we would like to give you a little more background to the field of targeted protein degradation, Evotec's approach to it and why we feel fortunate to have BMS as our partner here.

Let's move to Page 16 for this. The field of targeted protein degradation is one of the hottest fields in the pharmaceutical industry as it harbors enormous potential. Small molecule therapeutics are the mainstay of the industry because they have proven to be highly effective. Furthermore, due to they are oral availability, they are particularly compelling when it comes to the ease of use. However, there are limits to traditional small molecules. In particular, the fact that many high potential drug targets lack proper small molecule binding site to inhibit their function means that many high potential drug targets are essentially undruggable by our traditional small molecule approaches.

The discovery that small molecules can also be used to specifically trigger the degradation disease-causing proteins very significantly expands the universe of drug targets that can be treated via small molecules. This is the main reason why this field is drawing so much attention by the pharmaceutical industry. During the last 3 years, many pharma companies partnered with biotech companies to access technology or capabilities or know-how to support their small molecule efforts in targeted protein degradation. At Evotec, we have been collaborating with BMS in the field of targeted protein degradation since 2018. Yesterday, we announced the extension and expansion of this collaboration into long-term strategic partnerships, and the cornerstones of this deal are summarized on Page 17.

The aim of this partnership is to build an industry-leading pipeline based on molecular glue degraders, which is expected to deliver multiple novel drugs into the market. The partnership between BMS and Evotec is a formidable match that BMS being an established pioneer and leader in targeted protein degradation whereas Evotec will contribute industry-leading platforms, including, but not limited to, EVOpanOmics and EVOpanHunter, but also a suite of AI machine learning tools supporting the whole drug discovery value chain. Evotec will receive USD 200 million as an upfront payment and potential milestones in total of over USD 5 billion. In addition, Evotec is eligible to receive significant tiered royalties on each and every product developed through this partnership.

Page 18 is putting this collaboration in context of other deals signed in the industry. Many pharma companies are not only interested in the field, but also signed sizable partnerships with biotech companies. One of the largest transactions was the acquisition of the Vividion by Bayer. Most of the other deals focused around small number of projects or even just one project. When it comes to our partnership with BMS, we are excited about the opportunity to continue and expand our partnership to the leading company in the field. We believe that the scope, the length and depth of the collaboration is unique in the industry and sets Evotec apart from all the other players. But let's take a step back and briefly talk about how targeted protein degradation works, which is shown on Page 19.

Targeted protein degradation works very differently from traditional small molecules, which usually functionally inhibit target proteins by binding to one of their active sites. In contrast, small molecule degraders also bind to their target proteins, but here, the binding triggers proteolysis of the target protein and thus complete abrogation of the target protein as well as all its function. Triggering the degradation of the target protein is a multistep process as shown here. It involves a specific binding of a small molecule to a target protein with the concurrent recruitment of an E3 ligase. The E3 ligases then able to ubiquitinate the target protein, which subsequently shuttles it to the proteasome and this is where it's then ultimately degraded. Once again, proteolysis of the target protein not only aggregates its function on a particular active site, but completely removes the protein with all its functions.

Through this very different mechanism of action, molecular glue degraders have enormous potential in the field of small molecule therapeutics, which we briefly want to discuss on Page 20. As I already mentioned, small molecule therapeutics are the main stain of the industry, taking a drug orally is clearly the preferred way of administering a drug. Unfortunately many potentially highly effective drug targets like suitable small molecule binding sites to inhibit their function effectively by traditional small molecule inhibitors. Small molecule degraders have demonstrated the ability to target even these historically undruggable target proteins, this is particularly important considering that about 90% of the human protium cannot be targeted via traditional small molecules. So small molecule degraders are expected to significantly expand the universe of small molecule product targets and thereby open up opportunities to develop novel breakthrough drugs that are orally available therapeutics.

Besides being able to target drug targets that are historically seen undruggable, small molecule degraders have also a number of other advantages over traditional small molecule inhibitors. Small molecule degraders work catalytically that means that once they have triggered the degradation process of a target molecule, they can do this again and again and therefore, require usually smaller doses than traditional small molecules. Furthermore, as a degrader target protein, they are less likely to lead to the development of resistance. These advantages and the tremendous potential of targeted protein degradation have obviously been recognized by the industry.

On Page 21, you can see that as of today, more than 150 protein degradation based therapeutics have been reported to be in discovery and development in the industry. Currently, the vast majority of these are being explored in the context of oncological indications, but others should follow. What is interesting to note though is that the focus is currently still on PROTAC molecules rather than molecular glues. PROTACs, which stands for proteolysis targeting chimera molecules are fairly complex molecules and are not very drug-like.

They usually have 2 functional ends connected by a linker, which makes them bulky and unattractive from a number of perspectives. On the other hand, we have the molecular glues, which are much more elegant and drug-like molecules, and they have a number of advantages over PROTACs, which are summarized on the next page. In contrast to PROTACs, molecular glues are more drug-like and also have better pharmacological properties. In addition, they are usually more synthetically tractable, and for this reason, are also more attractive from a cost of goods perspective.

However, historically, PROTACs can be more easily pursued by a rational drug design approach against almost any particular target. For molecular glues, rational drug design against a particular target has been more challenging because the structure activity relationships were less obvious for these kinds of molecules. However, combining BMS's extensive experience and unique and extensive molecular grew library with Evotec's high-performance Omics platforms is the first unbiased and highly systematic approach to identify and develop a pipeline of molecular glues and has a great opportunity to develop a joint pipeline of molecular glue based therapies.

BMS is clearly the key pioneer and leader in the field of targeted protein degradation, and in particular, molecular glues, as you can see on Page 23. They were the first to elucidate the mechanism of action of molecular glues. BMS has successfully built an exciting pipeline based on molecular glues. And of course, BMS generated over USD 15 billion in sales based on drugs which act as molecular glues already. Furthermore, over the last 3 years, they have assembled a unique industry-leading library of molecular glues, which is generally referred to as CELMoDs. CELMoDs stands for cereblon E3 ligase modulating drugs, which is just another way of describing a molecular glue.

Together with BMS, we created a partnership to explore if it was possible to systematically identify molecular glues using an Omics based approach, and this is shown on Page 24. This collaboration, which initially was exploratory in nature, proved to be highly productive in identifying high potential molecular glues. This is the reason why we decided to extend and expand this collaboration into a long-term strategic partnership. As I already mentioned, Evotec will contribute a number of platforms, but most importantly, our PanOmics and PanHunter platforms, which are uniquely suited for this purpose.

On Page 25, we just want to give you a little bit of flavor on what sets Evotec's PanOmics platform apart from other maybe similar platforms in the industry. At Evotec, we have built a unique proprietary Omics generation platform, specifically for transcriptome and proteome data generation. These platforms, which are called ScreenSeq and ScreenPep, are not only highly versed when it comes to what cell and tissue types can be analyzed. But even more importantly, these platforms operate at unprecedented scale and deliver unprecedented quality of data. I just want to mention a couple of metrics.

Our transcriptomics platform operates at high throughput in 384-well format and still quantify up to 15,000 genes per sample. This is a resolution that is usually only achieved via deep sequencing. Similarly, our proteomics platform is able to process tens of thousands of samples annually, quantifying up to 10,000 proteins based on single shot proteomics. So what makes Evotec platforms unique as really the overall performance? They are unique, highly industrialized platforms which operate at unprecedented scale and deliver highest quality data in the most cost-efficient manner.

As our platforms are delivering absolutely huge amounts of Omics data, these data require a unique infrastructure for analysis, which is shown on Page 26. Exactly for this purpose, we have developed a platform that we call PanHunter. PanHunter can manage and integrate huge amounts of Omics data coming from patient samples as well as pharmacological data. The user-friendly integration of these data sets together with embedded AI machine learning data analysis tools allows data scientists to focus on answering key questions to drive the project forward rather than struggling to apply an IRC leading algorithm to a particular set of data. This enables us to better select the most promising molecular glues even very early in the process. We can better predict the efficacy and safety profiles of these compounds and accelerate their transition from leads to candidates through INDs as well as ultimately select the most appropriate patient's populations for clinical development.

We hope that this presentation has given you a little more insight into our strategic partnership with BMS in the field of targeted protein degradation. And in many ways, the fees of targeted protein vision is still at its very beginning. There are clearly further opportunities in the space that go far beyond PROTACs and molecular glues and even the proteasome driven targeted protein degradation. At Evotec, we continue to invest into these areas to create further partnership opportunities in the future.

And with this, I would like to thank you for your attention and hand you back to Werner.

W
Werner Lanthaler
executive

Cord, thank you so much for this crash course in targeted protein degradation. This was 15 minutes science as beautiful as it gets and how we transform science into high-value partnerships. And you will also see this is not only transforming science into partnerships. This will be science transformed into co-owned products, which is our strategy.

When you go to Page 29 of this presentation, let me step back because it's not only a company that's delivering science and co-own products, it's also a company that is delivering our contribution to the planet and to make the world a better place. With this, we will continue to report on our ESG and sustainability measures as we have taken them also in Q1, for example, by really starting to follow our scientific-based initiatives in many areas. We also, on a governance level are making a lot of progress and want to intensify our stakeholder dialogue on multi-dimensions here.

Page 30 comes back into our business. And you will see that we are significantly growing this company, the 10th year in a row now by more than 15%, which is illustrated on our guidance here, you will see that our unpartnered R&D will lead to significant partnerships also still this year. And as already mentioned, our EBITDA is a function of how much money we spend into R&D and also how much money we spend into growth into the future, but there will be clearly at least a stable EBITDA this year, if not more.

When you go one page forward, let me also comfortably confirm our midterm aspirations where we often say that we are just at the beginning, but it is just beautiful to see that there is no slowdown on the R&D Autobahn to Cures into the year '25 and beyond that. It's actually fair to say that some of the aspirations we feel that we are even ahead of the curve than we have planned this initially, but too early to tell in all details.

When you go forward to the last page, you will see that we are setting the pace also for this year in many dimensions. So you will see strong news flow coming from our R&D efficiency platforms with multiple integrated R&D collaborations to come. You will see that in our precision medicine platform, we do everything with our partners to bring probabilities of success up and with this has a better chance to bring our co-owned pipeline to the market.

And last but not least, we are very happy about the progress of our Just-Evotec Biologics, where we have started not only to complete our J.POD #1, but we are also making great progress in building J.POD #2 into lease. And you will soon hear about multiple partnerships that we are making in our Just-Evotec Biologics platform.

With this, thank you for your attention. Thank you for all your questions to come now. We are more than happy to answer that.

Operator

[Operator Instructions] The first question is coming from James Quigley at Morgan Stanley.

J
James Quigley
analyst

So on the BMS contract, can you give us an idea of how you expect to recognize the EUR 300 million upfront whether it's straight line or more of a proportion of completion base. And this deal is somewhat different. Some of the others signed this year, given it was a big upfront. So can you confirm that the royalty on the backend is similar to Eli Lilly, for example, and within your sort of I think it's 8% to 10% range that you have had traditionally. And finally, on the BMS, if you can give us an idea of how the milestone to split.

And one more question on Bristol as well. So you mentioned there's about 5 settlements in development in their pipeline. So what are they trying to achieve? Or what was the question that's trying to answer by using your platform by using the molecular degraders through your discovery partnership as opposed to what they're seeing already with iberdomide, particularly in Mylan, where that's shown some good data.

And then finally, just picking up on Just Bio. So I think there's been some questions this morning around the year-on-year growth rate, but then also on the sequential growth for Just Bio is quite a bit of a step down from Q4, where things around EUR 18 million, EUR 19 million in revenues for Just Bio and EUR 12.5 million or so in the first quarter.

So could you give us an idea of the dynamics there? Was there sort of a flurry of demand backend of last year as companies spend their R&D budgets? Are there any other impacts in terms of batch-to-batch variability or anything like that may have impacted the sequential as well as the year-on-year comparison for Just Bio?

W
Werner Lanthaler
executive

Thank you James. We do the following. We'll answer the Just question first. We then go to the CELMoDs rational question on the platform, and then we'll go back to the commercials on the BMS deal.

Let me start by Just and then hand over to Craig. We are very happy with the progress of Just Evotec Biologics, including our J.PODs. And a view from the month-to-month basis on a business that we are building there just would, I think, really confuse you on a too high level on something, where we see significant demand that is building up there. And that's why I wouldn't worry at all there, but maybe Craig, you can illustrate this a bit better.

C
Craig Johnstone
executive

Yes. I'll certainly try, Werner. Thanks for the question, James. As Werner said, we're really happy with what's going on. I mean, to your specific question about, for example, the Q4 to Q1, of course, inevitably, there are some revenue recognition elements of completion of batches and so on. But actually, the main driver for a shift between Q4 2021 and Q1 2022 is that during the course of 2021, there were revenues that were being brought in and recognized as we progressed through the completion of construction and indeed technical and operational readiness, which came to an end when the facility opened in Q4.

And so what you see in Q1 is all customer-driven, partner-driven demand, and revenue recognition. But as we are on our warrants and as I'm sure you're familiar with, there will be a certain amount of up and down as the immediate future view for Just. And hopefully, you can bear with us and watch out for the news flow that we look forward to sharing with you during the course of the year.

W
Werner Lanthaler
executive

Thank you so much. With this maybe, Cord, I hand back to you on the synergistic platform from Evotec to the BMS pipeline building activities?

C
Cord Dohrmann
executive

Yes, gladly. So unfortunately, I cannot comment in any details you on what indications we are in particular targeting other than that oncology is clearly a key area of interest. I think, but what I can say is, though, that we are clearly shooting or selecting for high-value drug targets, which are either traditionally unlikeable targets to basically so far they clearly have shown the interest of the industry, but people have just not been able to develop classical or conventional small molecule against these targets or for targets, where a target protein degradation approach is simply superior even against the traditional small molecule approaches. And there are a large number of these potential drug targets out there already, but through this approach in particular through our Omics driven approach so that it allows us to get to this faster and quicker and to select them more precisely and earlier.

W
Werner Lanthaler
executive

Thank you so much Cord. With regards to your more commercial question on the transaction, I think it's fair to say on the milestone split that we are not talking about here end-stage milestones only. We are talking about very near-term achievable milestones in the pre-clinic actually already in the discovery phase. With this, there is a significant milestone potential really near term in this EUR 5 billion, which you will see once we achieve certain elements here. When we talk about royalties; it's tiered royalties, which can go beyond 10%, which is also fascinating from recognition of the power of our technologies in this transaction. But overall, 8% to 10% average royalty rate on our co-owned pipeline that not only applies to this transaction is, I think, a very good estimate to apply.

When it comes to revenue recognition, we have not shared the final agreement with our auditors at this stage that is why we cannot fully comment because we have just signed full agreement yesterday afternoon, but there will be 2 elements. One is, of course, a time element of the EUR 200 million depending on how we phase the work here. And the second element is element of completion, which are basically to be finalized with our auditors first, and then we can give more color here, but you will see both elements that will lead to revenue recognition here. And this may be also last sentence here; we have a part of this transaction, of course, always assumed to be part of our top line this year. How much of this falls into our bottom line, we'll definitely see once we have done the full analysis and we are working on this analysis.

Operator

The next question is coming from Zoe Karamanoli at RBC.

Z
Zoe Karamanoli
analyst

2 questions for me, please. First, on guidance, you're growing faster than your guidance implies. And yesterday, you announced the extension deal with BMS with the significant out front for this year. However, you have reiterated your guidance for this year. So could you help us understand what's holding you from raising guidance? And what are the things that we should be aware of? That's the first question. The second question is on the investment in Evotec equity. If you could elaborate where those investment opportunities derived from the portfolio, is it Innovate or is it outside this?

W
Werner Lanthaler
executive

On guidance, so we thank you so much for your question. First, it's early in the year. Second, we see a very strong order book, actually the strongest order book in the company ever. Thirdly, at this stage, we see and that's not only true for Evotec, it's true for many other companies as well. We see many more insecurities when it comes, for example, cost increases, supply chain increases than before. We are constantly double checking all these processes. We have just started to review this process again. And I think with this, it's very fair to say that we can comfortably confirm our guidance on the basis of a strong order book, a strong outlook and a strong deal pipeline, but it would be just too early in the year to change the guidance that we have very diligently prepared for the first quarter and also for now. But again, it's something that we constantly monitor.

When it comes to Evotec equity, we have multiple sources of where we find our sweet spots to invest. But there is one element, which has to be always in place that there is an operational synergy of the companies where we invest to Evotec platforms because this principle of the sharing economy where we want to learn together and make things better together, that's really across the board of all our co-owned companies, the case when it comes to where do better deals to come from you, comes from our network, comes from outside of Evotec, comes from invitations of our partners in the venture world, comes from invitations from other companies who want to create companies together with us, like, for example, Sartorius. So there's a multiple source inflow, which then very diligently is explored on our platform. And then we are investing in these companies.

We have, of course, also the opportunity to spin out companies that we are generating on our R&D platforms within Evotec Innovate. And here we are, as we speak, working on certain opportunities as well.

Operator

The next question is coming from Joseph Hedden at Rx Securities.

J
Joseph Hedden
analyst

I've got 2. Firstly, on the gross margin, you've highlighted some reasoning behind why that's a little lower this quarter. Just wondering what your expectations are for the rest of the year, are these pressures set to continue? Or do you expect a rebound?

And then secondly, on the BMS deal, congratulations, by the way; Slide 23, just looking at the oncology in the pipeline here of the projects at Celgene and these other companies have and they're ordering the oncology space. Now is this purely because these companies have a big research interest in oncology? Or is there some kind of reason that the molecular glue approach is more suited to oncology than other disease areas?

W
Werner Lanthaler
executive

Yes. So the gross margin question goes to Enno. And other areas for protein degradation, Cord, would be great if you then comment as well.

E
EnnoSpillner
executive

Okay. Joseph, pleasure having you on the call here today. So on the gross margin, there are a few things that will stay. Like, for instance, I was referring to the increased level of depreciation, thanks to building and going online with the site in Redmond, for instance. Ramp-up cost of Just is also there still for this year to continue. On the other side, if you look at Q1, in particular, you will recognize that similar to last year, we did not have significant milestone income. If you compare that, for instance, against a quarter Q4 of last year and also here, I mean, clearly, we want to achieve further milestones this year. And depending on those, could expect on average that the gross margin should increase compared to where we have been in the first quarter.

W
Werner Lanthaler
executive

Which is by the way a pattern throughout every year if you follow us in the last 12 years? And maybe Cord on BMS and other areas.

C
Cord Dohrmann
executive

Sure. So in the targeted protein degradation field, each and every company, of course, sets preferences according to disease area indication that they interested according to their own strategic goals. And that is not necessarily always adequately reflected in the still early stage pipelines. However, the oncology field, of course, always draws particular attention, mainly because over the years, it has assembled quite a large number of potentially very high-value drug targets where the pharmaceutical industry has simply not been able to find adequate molecules to target them.

And in that regard, so there is a little bit of a backlog, I would say, of potential drug targets to go after using a new modality such as targeted protein degradation and here, in particular, using PROTACs because here, the rational design approach is simply a bit more straightforward, even though the molecules themselves are clearly less attractive than molecular glues. And we feel that the molecular glues, over the long term, clearly dominate the field because they are simply much more attractive small molecules from a chemical and oncological perspective. It's just been, like I said, been more difficult to use a rational design approach here. But this is with the approach, we are taking with BMS here, which is once again, highly unbiased, very systematic is something that is becoming much less of a bottleneck.

W
Werner Lanthaler
executive

And I think it's fair to say that areas where molecular glues and targeted protein degradation will be found is in CNS, is also an infectious diseases just to name 2 areas where you will see this field also evolving.

Operator

The next question is coming from Christian Ehmann at Warburg Research.

C
Christian Ehmann
analyst

I have about 2 and I know the question about what was margin company-wide was asked already, but I hope that you would give us a little bit more guidance and what revenue contribution and gross margin you expect to develop over the years, as it has a considerable impact on your gross margin overall or at least much for the able to execute segment? And the second question is more in line with scientific ones. So what exactly is the difficulty in developing or identifying certain molecular glues? I would mention something like steric hindrance or something which makes it much more complex to predict those molecules, but maybe you can give us a few insights how this differentiates you from other parties.

W
Werner Lanthaler
executive

Thank you so much, Christian. I would say, the broader outlook and also the gross margin implications and capacity buildup. Craig, it would be great if you give us a bit more color again. And then I bank to Cord again on the CELMoDs question.

C
Craig Johnstone
executive

Sure. Thanks, Werner. Christian thanks for the question. You're right, of course, that the fixed costs in the J.POD are substantial at spec facility and the full impact of that are pretty much the full impact of that is carried in the Execute segment. But that's actually why we're actually quite satisfied and pleased that the trajectory in Q1 indicates our baseline for this year and that we are looking forward very much to our revenue build up as the year goes on, which will then progressively, if you like, dilute the fixed costs. And this is really a phenomenon of starting a large facility, which really came online in Q4 of last year. And of course, we're really in the transition as we look over the next 12 months to fully build up, fully utilize, and fully have the pipeline flow of deals and business that will take us into 2023 and beyond.

W
Werner Lanthaler
executive

Great. I hope that answers your question. And with this, again, to the CELMoD part and the scientific element here to Cord.

C
Cord Dohrmann
executive

So I think the question about sort of what are the key hindrances or in the field of the developing targeted protein degradation approaches in particular, molecular glues. So simply said, the field in many ways is still in the very beginning. So as I alluded in the presentation, targeted protein degradation currently is mainly focused on using the proteasome of the cell to essentially shuttle proteins that we usually do that function to the proteasome for degradation. And this involves, in particular, E3 ligases that basically trigger ubiquitination event of the target protein and then ultimately leading to degradation at the end.

The key problem here is that with molecular glues, in particular, the structure activity relationships are not as well understood as in many other areas. But in my view, this is just a matter of time and numbers of molecules to be made in the future to better understand exactly how the structure activity relationship works and how exactly a molecule needs to look like in order to present it in the right confirmation as a way for a ubiquitination event and ultimately, a degradation event. So I think this will definitely move forward.

The other hindrance is that currently, the field is very much focused on one where very few E3 ligases that are currently explored in the context of targeted protein degradation. However, in the genome, we know that there are on the order of 600 to 700 or more E3 ligases in the system and many more E3 ligases are probably suitable for similar targeted protein degradation approaches. And so once again, the field is still in its very beginning.

And I think that, once again, in particular BMS through the extensive experience with molecular glues already, and also, in particular, the CELMoD library, which is essentially by far, the largest collection of molecular glues in the industry, plus deep understanding of the mechanism of target protein degradation via the proteasome and to care of that is absolutely industry-leading. And as also mentioned already, we bring a key component here with the Omics driven approach to this particular problem, which really fits a key extremely well as well as in other areas, though, and I think we together be extremely well positioned to really bring [indiscernible] all the way to the forefront in this field going forward.

W
Werner Lanthaler
executive

I have a next question here from Peter Welford. I don't know if your line can connect, but it would be great to have you on the call here.

Operator

Yes, next question is coming from Peter Welford.

P
Peter Welford
analyst

Can you hear me?

W
Werner Lanthaler
executive

Perfect.

P
Peter Welford
analyst

Great. I've got a few questions. Firstly, if I can just add on the Just Biologics, I wonder if you could talk a little bit about the type of customer you're engaging with and seeing demand from here. I guess curious if you can possibly give us a split based on internal versus pharma versus biotech. The reason for the question partly is, I think, particularly it'd be good to know how much is your exposure is there to the biotech customers because I know there are some who are obviously concerned given the funding environment, what that could be. So if you could talk a little bit about the demand you're seeing there, that would be helpful.

Secondly, then just on CapEx, I wonder if you could just talk a little bit about the phasing of the CapEx we should be considering for this year. Obviously, a relatively big year for CapEx. We've seen similar ready in the first quarter. How should we think about the phasing over the coming quarters? And also, if I could push you on 2023, how much less CapEx, I guess, do you think potentially at this stage we could anticipate for '23?

And then if I could just ask on the Bristol deal. I'm curious to hear in terms of is the deal exclusive in terms of particular targets of interest that BMS elects to opt in on and then locks up those targets? Or equally, and you mentioned this in terms of the E3 ligases. Can they lock up certain E3 ligases within this collaboration that others then can't work on? And equally, is it possible for them to lock up certain, I guess, hooks or linkers within the molecular glues that you're using? I guess just curious in terms of what sort of exclusivity they have? Or really is this just very, if you like, just [indiscernible] specific? That would be great.

W
Werner Lanthaler
executive

Yes. Thank you, Peter. I will hand over on the exclusivity to Cord at the end, to Enno in the middle. And let me give you a color on Just Biologics directly.

We are as disclosed working a lot and hopefully even more with the Department of Defense, which is not exposed to any biotech slowdown in funding. We are working a lot and hopefully, in the future, more with Merck as our first pharma partner that we have already signed up for a pilot in Just and we are discussing at this stage and also have signed up with multiple pharma partners, multiple biotech partners, and we don't see a slowdown or a danger of biotech funding within these customers at all. Of course, we are pretty aware of the market situation, but it's not the partners that we are at this stage, seeing who would have not funding available. It's really does our technology fits to their situation in their value chain, what is more driving this question.

The second customer segment that we want to highlight is that we are working a lot, as you know, with, for example, foundations like the Bill & Melinda Gates Foundation, who is very found customer of our technology there because we can address disease areas with our biologics that otherwise cannot be addressed with other technologies like Brigham infectious diseases. And thirdly, we are also working on projects that are coming from our internal pipeline and our co-owned pipeline in the future within Just Biologics.

So to address the question, do we see an impact of the slowdown of the funding environment on any of our business lines at this stage? I have to say no. And I can underline this again with what I have already pointed out, the strongest order book that we have seen in the history for 2022. And a lot of that is also already order book, which is building up into '23, especially in biologics, because, as you know, these are very long-term phased projects. And the same is also true for our development business where there is very long-term sales business that is already part of our order books. I go back to the exclusivity question, Cord, and maybe if you can comment on that.

C
Cord Dohrmann
executive

Yes. I am happy to do so. Yes, so in regards to exclusivity, yes, there are exclusivity provisions in the contract, of course. Generally, Evotec structures exclusivity around individual targets where we have co-ownership in terms of milestones and royalties. And in this particular contract because it is long term and very strategic, there are some additional exclusivity provisions that I don't want to comment on here, but I would say looking at the whole field of targeted protein degradation and it's sort of been alluded to that on Slide 27.

The whole field is much bigger than what we currently work on together with BMS, and there are many more opportunities where Evotec is actively investing into alternative strategies. I already mentioned there are very interesting other ways than going via the proteasome. When it comes to targeted protein degradation, there are ways to particular target self-surface ligands, there are ways how to go via non-E3 ligases and then there are a whole universe of additional ligases that are currently not pursued by the industry.

W
Werner Lanthaler
executive

Thank you so much. And on the CapEx question, back to Enno.

E
EnnoSpillner
executive

Yes. Peter, happy to take the CapEx question, where we have seen roughly close to EUR 45 million in Q1 of CapEx. And we will continue to significantly invest so that we would expect some final amount for the full year in the range of probably EUR 250 million to EUR 300 million more than the EUR 250 million. And currently, outstanding here is really the second J.POD, which we are now starting to build, having the kickoff for the building construction side and hopefully this summer. That said, we have already preordered quite a bit of CapEx. So that will be a very significant amount of the total expenditure.

The other part is really about expansion growth as I said before in the call, basically currently investing at every single facility aside; obviously, from scaling the technology platforms and our capabilities also in that regard. So you should expect to be in that range and also for 2023 going forward, obviously, this construction site will still be there. We obviously want to go online here in 2024. So it will remain on a high level, a little bit challenging to say whether it will come down significantly compared to what we have this year as other things like finalizing the J.POD 1 in the U.S. will come to an end once we have ramped up.

W
Werner Lanthaler
executive

And maybe an additional comment here. If you go back to our prospectus when we went public in the October of last year, this was very clear; our intent and our use of proceeds to also invest into CapEx. So that's why I think it is important also to say that we are doing what we promised our investors to do with this money.

Operator

There is one more question coming from Victoria English at MedNous.

V
Victoria English;MedNous;Co-founder and Editor

Werner, you mentioned CNS briefly in the course of the question and answers about target areas for molecular glues. Without commenting on your BMS deal, I'm just wondering whether, in general, you see neurological diseases as a potential area for this technology. I'm thinking, in particular, in getting a hold of amyloid data.

W
Werner Lanthaler
executive

Nevertheless, the competent or more competent person on the call to answer this question is Cord.

C
Cord Dohrmann
executive

Thank you for your question. So in principle, targeted protein degradation approaches, as I said, are, of course, broadly applicable to essentially almost any indication. And we currently have in our collaboration with BMS, we currently have focus oncological indications, but I think it's fair to say that we have not excluded any potential indications at this point in time. And we do have, of course, a vested interest in the new space through our other BMS collaboration. And I think it's fair to say that here we are, of course, open to create synergies between these. But it's something, once again, where we feel we really want to go for the sweet spot of the targets essentially in target space, and that's really the key driver of that.

W
Werner Lanthaler
executive

I don't see any further questions in the row here. With this, let me thank you so much. Let me also highlight that we will, of course, put all the slides on our website. And if there are any [ while ] studying the materials, please reach out us to Volker directly or to anyone of the management team. We are more than happy to answer your questions.

With this, have a great day, and thank you for following Evotec.

Operator

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

All Transcripts

Back to Top