Evotec SE

XETRA:EVT

Earnings Call Transcript 2021-Q2

[Operator]

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

[Werner Lanthaler, CEO & Member of Management Board]

Thank you so much. This is Werner speaking from Evotec. Welcome to our Q2 report 2021. We have uploaded a presentation for this conference call, which is titled, Driving Growth and Getting Ready for Launch. That's the theme of this first half of '21 that we are preparing and investing for accelerated and future growth out of all lanes on the R&D Autobahn to Cures.If you go to Page #2 of this presentation, let me welcome our CFO, Enno, who is here together with me and who will guide us together with me through this conference call. If you go to Page #4 of the presentation that we have uploaded, you see that we are performing extremely strong on all lines of our R&D Autobahn to Cures. It's actually fair to say that the company is in a strong, maybe in a very strong situation. We can say this for our base business and we can also see this because some of the very important milestones for our profitability are imminent.If you look at Page #4, you see some of the highlight events that have happened in the past few months. But let me point you to one, which I think is extremely important, which is the new data that came in of the Phase IIb study on P2X3, which was delivered by our partner, Bayer. Why is this important? Not only that we confirmed excellent data that we have already seen in Phase IIa, but it is also confirming our long-term business model where we are building the largest royalty pooling industry and where P2X3 will be an important first element to this long-term strategy. What you see also on these highlights that all lanes are at full speed at this stage and you will see that with milestones coming in, also not only our top line is growing very nicely, but also our bottom line will grow nicely.With this on Page #5 of this presentation, let me confirm our goals for '21 when it comes to our financial goals, but let me also confirm that our scientific goals for long-term value creation are on full track.Page #6 of this presentation is just a reminder that we do what the industry really needs by integrating and bringing together the best of science to the best of platform on Evotec. We are creating an innovation hub that delivers what R&D efficiency is at its best. With this achieving leadership in data science and multi-modality for better and more access in the industry, we see a mega trend that is just starting and that Evotec is creating and leading at the same time.If you go to Page #7 of this presentation, you should see and this page should indicate to you that we are offering our services on a stand-alone basis. But increasingly, we see what we call EVOiR&D offerings, which is basically integrating all our offerings into packages that truly deliver to our partners and to the industry.At this stage, we can report back to you that we see order books that are at record levels for long-term demand on basically all our offerings and that's also driver for us to build capacity into the future because we see a trend that does not stop when it comes to research that comes from Evotec.On that note, let me hand over to Enno who will bring you a bit deeper into our financials at this stage.

[Enno Spillner, CFO & Member of Management Board]

Pleasure to do so and thank you, Werner, and to all of you, a very warm welcome. Great having you here on the call today and I'm looking very much forward to introduce you to our Q2 2021 financial numbers.Let's continue on Page #9. And looking at the H1 2021 numbers, which show an excellent 17% increase on our revenue line, substantially pushed by the development of our base business. And adjusted for FX and portfolio effects, we even would recognize a strong 27% gain in organic growth of our revenues. I will come back to the further analytics of these growth factors later on Page 12.The gross margin amounted to 20.8%, lower than last year's 23%, and this is mainly due to the often mentioned and end of the Sanofi subsidy for our site in Toulouse after the Q1 2020. R&D expenses continue to increase as anticipated by a strong 90% compared to last year's level, especially driven by further enhancing our multiple platforms and pushing our co-owned pipeline. The growth in SG&A comes in at an expected plus 27% and aims to secure further organic and inorganic growth as well as integration, like, for example, the recent Verona site takeover from GSK and especially ramping up our J.POD 1 getting ready to become operational very soon.The other operating income turns out to be slightly above last year's level and contains 2 components, almost traditional one could say: on the one hand side R&D tax credits and the Sanofi recharges for ID Lyon on the other side. All in all, this development results in an increase of 7% of the other operating income.With a total of EUR 36.2 million, our adjusted EBITDA lands within our expectations, but also experiences shift of anticipated milestones into H2 of this year. So details on this to come on Page 14.The net income amounted to EUR 111.9 million and benefits substantially from a very positive one-off effect in the non-operating income, resulting from a fair value upgrade of our Exscientia EVOequity engagement. And Exscientia successfully closed 2 financing rounds in March and again in April of this year, which changed also the valuation of our shares quite significantly.The next slide depicts our strong base business development, leading to the above or before mentioned 17% overall sales growth. And this is despite negative counter effects such as the end of the Sanofi Toulouse subsidy and unfavorable FX effects. Therefore, our base revenues adjusted for these effects year-on-year even grew by 22% and milestones in that context have also doubled against H1 2020.Margin-wise, we arrived within expectations. The decrease versus last year is triggered by the same effect as just described for the revenues, plus additional ramp-up cost for the J.POD 1 in context of preparing the launch. Adjusted for the Sanofi and FX effect, actual total margin would be visibly above the prior year margin.Taking a look into H2, we expect substantial additional income from milestones that were originally foreseen in Q2 2021, thereby further improving the margin. That's our anticipation here. Looking at the 2 segments, both continued to grow and performed well, reflecting a broad basis of our growth.And looking at Execute first, year-to-date Execute revenues, including intersegment revenues grew plus 18%, coming from EUR 237 million in H1 2020. And this is driven by an increasing demand for integrated offerings and a strong demand for the base business. The Execute gross margin for first half of 2021 basically experienced the same effects as just described for the consolidated group and the same is also true for the Execute adjusted EBITDA.H1 2021 Innovate revenues amounted to EUR 57.3 million, excellent 27% above last year due to continuous high demand for precision medicine and reflected by expanded existing as well as several new partnerships. Innovate's total R&D amounted to EUR 40.5 million, 27% above last year, once again confirming our continued investment into innovation projects and long-term sustainability. The Innovate adjusted EBITDA was negative, but within the forecasted range and amounted to minus EUR 15.7 million versus last year's minus EUR 11 million. And here, the main reasons were the anticipated increase in R&D and SG&A investments, like, for instance, further developing our PanHunter platform.Looking at the year-on-year revenue development, the increase is mainly driven by our very significant plus 27% organic growth for the base business reflected in a EUR 60 million step-up versus last year. This is another evidence for our continuously high revenue quality coming from a healthy mix of our sustainable repeat business with our long-term partners and strong additional demand for our EVOiR&D offerings. Mostly due to the weakened U.S. dollar against the euro in the first half of 2021, revenues were negatively affected by a currency effect of minus EUR 11.5 million and at constant 2020 FX rates applied, sales would have ended even better at approximately EUR 283 million. So based on this very positive overall development, for the full year view we expect to come out with the upper half or within the upper half of our 2021 guidance.Moving to Page 13. Well-balanced global reach has always been the strategic goal in our building -- or in building our innovation hub and the current portfolio mix of our partners and where they come from points absolutely in the right direction what we want to achieve.On Page 14. Netting out the already priced in portfolio and negative FX effects, Evotec's EBITDA shows once again organic increase of EUR 5 million compared to H1 2020, even overcompensating contrary effects from increased R&D investments, SG&A for growth as well as the delay of certain milestones. In the end, the achieved EUR 36.2 million lie within our estimate.That said, to further support our strong business growth by, for example, significant business ramp up, continued capacity expansion investment into R&D sustainability as well as facing some FX headwinds, we currently estimate our full year adjusted EBITDA to come out in the lower half of our guidance range for 2021.Coming to the Q2 results, we can see the temporary impact of the capacity buildup for future revenue and margin expansion. Q2 2021 numbers show a strong 24% increase on the revenue line, coming to EUR 138.2 million, and this is reflecting the excellent base business across all lines and despite FX headwinds.Gross margin development. Gross margin developed well, mostly due to the growing base business and higher milestones than in the first half year of last year, obviously. R&D expenses increased by 15% to EUR 17 million, in line with investment-driven expansions of our co-owned pipeline and our platforms. We also observe a similar, even stronger, dynamic development for SG&A costs, laying the foundation for further future growth.Other operating income is partially positively influenced by a new legislation in Italy, which once again leads to a higher part of eligible cost and thereby higher R&D tax credits, while the overall tax credits volume from most of the other countries, such as France or the U.K., keeps increasing as well. The net income amounted to EUR 59.2 million, substantially benefiting from the second fair value adjustment of our Exscientia EVOequity engagement in April.Slide 16 summarizes Evotec's very solid and sustainable non-P&L-related financial KPIS. Looking here at the balance sheet, which is going up by 11%, mirroring the ongoing dynamic growth. One relevant reason for the step-up is the valuation increase of our Exscientia holding, which had a single total impact of EUR 116 million in total H1. Furthermore, trade accounts receivables could be further reduced, leading to an improved DSO figure.In addition, the equity ratio steps up to a good 53% and the net debt position, including IFRS 16, shows an excellent ratio factor of 0.7. These factors together indicate plenty of headroom and a lot of flexibility to further invest into organic and strategic growth. Total liquidity decreased to EUR 450 million at the end of H1, mainly driven by expected CapEx investments to support growth projects such as the J.POD 1 in Redmond as well as general expansion of our capacities across sites and equity activities.Page 17. On Monday, the 2nd of August 2021, Evotec released an ad hoc news that we are going to -- that we are going for approval offering of ADS at the NASDAQ in the U.S. And with this potential listing, we want to increase engagement of U.S. institutional investors, while at the same time supporting and accelerating our resilient growth in terms of expanding our scale and presence in the U.S., improving our chances for market shares -- share gains and getting closer to our industry partners in the U.S. In the end, Evotec will become even stronger and better prepared for reaching our very ambitious long-term goals.And with this, I complete the financial overview and hand back to Werner. Thank you.

[Werner Lanthaler, CEO & Member of Management Board]

Thank you, Enno. When we say building for growth, and if you go to Page 20, it is a great pleasure to report back to you that at this stage we are growing our footprint at every site where Evotec is present at this stage. And when we are growing, we do this because we see a long-term mega trend where the increased externalization of innovation is improving productivity, and that's why our platforms are so well positioned from our global sites to support the pharma industry, the biotech industry, and academia and foundations. With this, we are also able to recruit and retain the best talent in the industry, which we are also growing at all sites at this stage.If you go to Page 20, let me highlight one site for a moment. Because incremental growth on all sites is great, but it's even better if we see a chance and can make larger moves. We did so in the past, if you remember, in Toulouse where we took a full site from Sanofi and now we were able this year to take ownership of the former GSK discovery center in Verona. And full ownership here gives us more flexibility, more expansion space and also makes the site more attractive for our partners. And something that is very attractive and outstanding also deserves an outstanding name. And with this, in the full traditional signs of Italy, we are a proud Campus Levi-Montalcini now in Verona in the tradition of neuroscience of Italy that changed the world globally.If you go to Page 21, it is a very emotional moment for me because if you would have asked me at the peak of the pandemic if we could ever finish one of the largest construction sites that is currently ongoing globally to build capacity for biologics, I would have probably taken a big breath and I would have probably also had my doubts. And it really deserves a big applause and all respect to our team in Redmond and in Seattle and the global network of Evotec to make this happen and to make this happen in time.And many of you have followed large constructions of other organizations. They were never in time, and they never delivered what they promised. This is a unique moment that we were able to send out today that we are celebrating the grand opening of J.POD 1 U.S. in time to be operational still in Q4 '21 by basically bringing disruptive biologics to the patients in the future out of that site. And again, I think it's not allowed to clap and to have an applause on a quarterly call, but if I am allowed so I would do so because it's simply fantastic what our team has delivered there.If you go to Page 22, you see us in this spirit going forward and continuing the global rollout for our J.POD idea because there will be a strategic shortage of biologics capacity on the globe and that's why it is important also in Europe to build and create a J.POD. What is a J.POD? A J.POD is the systematic thinking of how can we make better and more efficient biologics from the very beginning to the very end. And this systems approach to biologics, starting with the machine learning J.HAL solution and going to a full commercial manufacturing solution that we call J.POD, is what Evotec is bringing to this lane of the Autobahn, Just-Evotec Biologics.If you go forward to Page 23, this is a reminder of our strategy. Our strategy is to create the largest royalty pool in the industry by co-owning as many assets that we've seen or that we hold as valuable assets in our portfolios. And if you look at this iceberg of opportunities, you should see that the iceberg is not only growing, but it's also going closer to situations where we will see the first royalties flowing into our P&L. And that's why it is very comforting to see that the progress within this pipeline is ongoing and you only have seen one highlight there with P2X3, but we are also happy to report that a lot of our discovery projects and a lot of our pre-clinical projects are moving closer to the clinic, and this will also trigger milestones because the reopening of many of the clinical centers is accelerating this movement.If you go to Page 24, we want to highlight one precision medicine platform, which very often always stands a bit behind our outstanding induced pluripotent stem cell platform, which is what we have built in protein degradation. Highlighting here our BMS partnership in protein degradation is worth it because we have not only significantly expanded this partnership, but we have also basically translated our protein degradation platform into a completely new disease area, which unfortunately we are not allowed to disclose, but it is scientifically a very, very interesting field that we are entering here together with our partners.And as I mentioned the iPSC platform already, this is also an area where this year we still expect very important news because we hope that we will be able to report back to you that the first novel mechanistic new small molecule coming from our induced pluripotent stem cell platform will enter the clinic and with this really prove the efficiency and the potency of this platform.If you go to Page 25, the pipeline look is getting closer and closer to the market and the green tick on P2X3 I have already highlighted. The beauty about this green tick behind refractory chronic cough is that the confidence level that we have, that we will also see positive data coming in other indications where our partner Bayer is already in Phase II trials, is increasing. We say this because a Phase II trial in endometriosis is ongoing, in overactive bladder is ongoing, and in neuropathic pain is ongoing, and all these trials, of course, gain confidence when you see the excellent data that Bayer has reported from their PAGANINI trial Phase IIb.If you go to Page 27, I want to highlight that we all understand that we are -- if you go one page forward please -- that we are in a situation we are bringing the industry closer together, is also a social responsibility that Evotec feels where we feel that if we can provide solutions, we have to bring them to the industry and offer them. Because Evotec doesn't want anyone to be ever locked down again because of a virus where we were not prepared.That's the spirit behind our PRROTECT initiative that we want to apply the lessons learned from COVID-19 already now to be prepared for the next pandemic and to have here solutions in our drawer to be, for especially therapeutic antibodies, well prepared and have therapeutics in our hands. We have reached out to multiple NGOs globally and to multiple governments, and we see a very positive response to this initiative, which we again do for social responsibility reasons more than for profitability reasons because we think it's important to show our platforms here to the industry.What I also want to highlight is that, of course, behind virology are people who make that happen. And on Page 28, we are very happy to report back to you that especially in the field of virology, one of the global experts of this field decided to rejoin Evotec because we are running here very fascinating projects and one of them you have seen. There's a Phase 1 project ongoing in chikungunya, which is a therapeutic antibody. You are also aware of the fact that we are very active in COVID-19 biologics with many partners, but also by creating here new assets. And of course, we have already highlighted in one of our Capital Markets Days that we are very engaged in the field of Hepatitis B. Kara Carter rejoining us is also putting the best management behind this portfolio of projects, which we want to bring forward rapidly.Page 29 is highlighting that when we talk about sustainability measures in ESG, this is not a lip service. This, for us, is a commitment that we have given to our employees, to our stakeholders and also our industry partners. It is time that we all worry about the planet and the company has to show that we take up this responsibility. Showing is one thing, implementing it in organizational alignments and in individual goals as we have done it within Evotec is then the clear action that managers have to take and want to take because we take ESG serious.If you go to Page 30, we are very happy to report back to you that our BRIDGEs initiatives are growing and that the translation of academic science to the best industrial platforms is finding more and more response globally. With this 4 new activities in the first half of '21, we really think that it's just the beginning of a global rollout of this initiative, which you will see and which is part of our action plan 2025. And if you go forward, the idea of creating the largest royalty pool of the industry is accelerated and safeguarded also by our strategy to co-own certain companies where we feel that the operational synergy between these companies and Evotec is creating special ideas with special value points to come. And this is just showing you the updated version of what our operational portfolio of equity holding at this stage looks like.And if you go to the next page, you see that we are confirming our guidance of '21 and we expect very strong news still to come in the second half of '21, which will lead to a very strong top line from EUR 550 million to EUR 570 million, which will lead to an EBITDA of EUR 105 million to EUR 120 million, with at the same time accelerated R&D investments which we expect to be in the range of EUR 50 million to EUR 60 million. And we are doing all of this at a moment in time of the company where we are building for growth by investing into, for example, large CapEx initiatives behind our J.PODs and other parts of our footprint.We do this because we have a long-term view to our business, which you see on the next page. Because if you look at Action Plan 2025, we also can confirm that we are well on track to go forward not only for one year but to follow the megatrend of external innovation with our Action Plan 2025 into the years to come. And with this also confirming our long-term ambitions on a quantitative level to go beyond the EUR 1 billion in revenues to go at higher gross margins with EBITDA levels of around EUR 300 million forward and most importantly, to grow our co-owned pipeline to a significantly higher number of co-owned assets under our belt.On Page 35, you see that there are multiple technical events upcoming when we report back to you our numbers. But one of the reasons why Craig and Cord are not here today is that we want to deliver an excellent Capital Market Day to you where we will present more from our operations and more from our science on the second of December. And with this, let me ask you please to mark your calendars for that day and then you will have a very extensive scientific and operational presentation by our 2 colleagues who will then bring you even deeper into Evotec.With this, we are ready for your questions. Look forward to a great day and wish you all the best.

[Operator]

[Operator Instructions] Our first question comes from Raj Selvaraju, H.C.

[Boobalan Pachaiyappan, Equity Research Associate]

This is Boobalan dialing in for Ram Selvaraju. I just have a couple. I'll list both of them. So the first one, so what are some of the trends you are seeing in the AI-based drug discovery and how Evotec is positioned to capture those trends? And second which is in terms of your Cold Spring Harbor Lab collaboration. What are your thoughts and expectations? And is the focus exclusively on developing biologics?

[Werner Lanthaler, CEO & Member of Management Board]

When it comes to artificial intelligence and machine learning, let me highlight first that we are probably the platform in the industry that does not only apply machine learning in small molecules, but we apply machine learning and AI in biologics, small molecule cell therapies and gene therapies. That's the first thing. The second thing, we are in this fortunate position that if we build an algorithm, we can make this algorithm learn not only from data that we generate internally, but our algorithm can learn on the platform together with more than 20 out of the top 20 pharma partners and more than 500 biotech partners at the same time with multiple sources of data that comes in here. Of course, we can only use this data if this is cleared by our partners and of course we are fully complying to that.The third element when it comes to AI and machine learning is it's a productivity tool that should guide us to more precision. And this is where I want to highlight our PanOmics and our PanHunter platform where we have not only generated data prediction tools, but also data analytics tools how we do this in the industry. And with this, AI and machine learning is for us an fully integrated idea and vision and is probably best exemplified by the number of young data scientists and biologists who are at the same time data scientists, that we have brought on our platform. And the future of drug discovery will be AI and prediction driven, and that's what we see in every process that Evotec is applying. And for example -- there's not enough time now, but how beautiful we translate this into safety predictions of the future will be exemplified also on our next candidates that go into the clinic because here safety levels should really be already predicted to a large degree when we bring these assets forward.On your second question with Cold Spring Harbor. Cold Spring Harbor is one very important and, of course, outstanding institution that we put into the mix of our academic partnerships where we are translating great ideas, not only in biologics, but from all modalities that we can find where they fit our platforms. And again, this is, for us, the rollout of our academic BRIDGEs by adding here an outstanding institution to that. Thank you so much for your question. We look forward to the next question.

[Operator]

And our next question comes from Joseph Hedden, Rx Securities.

[Joseph Hedden, Healthcare Analyst]

Congrats on delivering the J.POD 1 opening. There are questions around J.POD. So I'm just wondering how long -- I know you've got 12 PODs, I think you said, in the initial facility. I'm wondering how long it's going to take you to get manufacturing to full capacity in all those PODs? You mentioned a very strong order book and similar Department of Defense today as you're going to start manufacturing for them in November. I'm obviously wondering how much the initial capacity are they taking.

[Werner Lanthaler, CEO & Member of Management Board]

Yes. First, that there is no misunderstanding. We have 2 trains that are currently in J.POD 1 U.S. installed and in the facility. It's not 12, sorry about any misunderstanding there. The second point, we can expand up to 6 trains within J.POD 1 U.S. relatively rapidly. I say relatively because there's, of course, a full supply chain linked to doing that. And there is several quarters of preparation to do that if we want to go beyond train 1 and 2.What we are doing, we are building at this stage a pipeline where we are trying to really create the longest or the best optimal flow and the best portfolio mix into these first 2 trains of J.POD 1, which means that we want to bring co-owned projects into this portfolio mix, so co-owned biologics, but we also will work on fee-for-service contracts that we bring into this portfolio mix. And that's why the shortage of global capacity is really helping us here quite a bit, but we don't want to block our capacity with not value optimal contracts. I think that's one of the messages I want to give you.The second is, of course, that we see, yes, a very strong trend to have full capacity for the first 2 trains reached some times in the next 24 months. And of course, that will be then triggered by business demand to expand the capacity in J.POD 1 U.S. and also don't forget we are building J.POD 2 in Europe that we want to also have here, of course, a near-shoring solution wherever the mix of products is rightly done that way.So a long answer to a short question, we see full capacity, of course, coming and we expect, of course, also here an important boost because so far you have to imagine it's difficult for a new partner to believe in the promise that we will open a J.POD. Now as we can show around people in Seattle and in Redmond that it's an existing facility and that the FDA is coming and expecting that facility, and in the end that will give a lot of ticks to the checklist that have to be done for due diligence on our partners. So that's why the take up I think will stay -- will come, but of course, has to be fully endorsed with the full facility in place.

[Joseph Hedden, Healthcare Analyst]

Okay. If I could just follow up on J.POD 2. I'm just wondering what does that facility -- what's the plan for that in terms of size and capacity compared to J.POD 1? And obviously, you already had popped the J design business with Just-Evotec Biologics established in Washington. Are you going to be like-for-like in Europe? Or will there be some reliance on those services that are the manufacturing side coming from the U.S.?

[Werner Lanthaler, CEO & Member of Management Board]

Yes. That's the whole trick that J.POD is the exact blueprint that we built on site 1 and we are building it also on site 2. So copying this and allowing here for a global rollouts, of course, always is local adaptions that have to happen. That's the principle behind this J.POD and that's why we think that building J.POD 1 is an enormous achievement. And with this, we also think that JPOD 2 will still be difficult to make. But of course, you already have a learning curve of how things work because again, it will be the same blueprint that we are building globally. And when you see us counting from 1 to 2, you should expect that in the future we want to count even higher when it comes to the number of J.PODs.

[Operator]

Our next question comes from Falko Friedrichs, Deutsche Bank.

[Falko Friedrichs, Research Analyst]

Three questions, please, from my side. And the first one is on your guidance. Is there any way that you can give us a little more comfort on your adjusted EBITDA guidance? You sounded relatively positive about it. It obviously requires a very strong acceleration of your adjusted EBITDA in 2H. Is there anything you can share on how good your visibility really is into these potential milestone payments that you expect? Then the second one, an important topic in the market currently is obviously this rising input cost, rising inflation discussion. Is that something that you also noticed? Or can you compensate for most of these effects? And then the third question is, is there any update on your Phase III compound with Jingxin in insomnia? So is there still a full commitment from your partner here? And I thought on your slide, there's a Phase III readout expected soon. So I assume the answer is yes. And is this compound then on track to potentially launch to the market over the next, let's say, 2 to 3 years?

[Werner Lanthaler, CEO & Member of Management Board]

Yes. The cost question will be taken by Enno. The, I would say, confidence level question is a difficult one to give you more color than what we have done. But what can I say? The first thing is that it is part of our business model that milestone drives EBITDA and there's volatility in that because it's depending on biological results. And if you would know that every milestone that we achieved is coming, then it wouldn't be a milestone, then it would be a fixed planned event anyways.Having said that, we are so positive for the second half because we first see that the data points will come because clinical sites have opened, the IND filing processes are still -- are faster ongoing than they were ongoing in the recent months through the pandemic. We also see that the backlog of files that is handled at certain CROs is going down. So that's also why we are very confident that some of the data points that are outside of our control will come. Will they all be positive? We don't know. That's one aspect to that.And the second aspect to that is also, we just feel that by having -- and I know that's not for '21 guidance so relevant -- by having proven our business model with P2X3, that many other of these integrated R&D partnerships will be able to close still in '21. So there is not only the expectation of milestones coming in, there's also the expectation of novel transactions to happen where potentially an impact on our EBITDA will also happen.Having said all of this, the EBITDA number of '21 is one number, but the view of Evotec is a very long view where we are highly profitable, independent of we are -- if we are on the higher end of our guidance or at the lower end of our guidance. It's -- when it comes to the long-term value generation of the company, not that relevant because what we see is a very strong top line evolution. And I really want to highlight that again. And that just shows that the offering is working. When it comes -- so that's the color behind the EBITDA number, if that's helpful.And when it comes to Jingxin Pharma, Jingxin has actually accelerated their recruitment for their ongoing clinical trial quite a bit. They, in their public statements, are quite optimistic about handing in a file to the Chinese authorities in the near future, but it's not in our control. We are basically here, really following our business model that our partner has the full control and the responsibility to bring this asset forward. If they wouldn't do this, the asset would fall back to us. That's one thing. And the other thing is all the indications that we have is that they are going forward and launch this, and this is important to the Chinese market. So this is limited to the Chinese market and we don't expect this compound from Jingxin to be anywhere outside of China market by them.

[Enno Spillner, CFO & Member of Management Board]

Which brings me to the question on inflation -- too much into this industry -- which we're obviously recognizing and observing. We have a good pile of stocks currently, so -- and no short-term impact. And as we grow, also our buying power, so to say, increases so that we can also be more successful in terms of receiving discounts and reduced prices. So in that regard, no short-term or immediate impact, but we keep closely monitoring the mid-term perspective. And in that regard, for us it is more overall currently securing supply as due to the COVID pandemic there is still in some areas the risk that materials may be short, like -- simple things like plastics for packing material and sending it, which is currently more of our concern than the pricing.

[Werner Lanthaler, CEO & Member of Management Board]

Okay. But of course, we see inflation trends, we see material costs going up, which, of course, also is influencing our gross margin at this stage. But midterm, we want to start and manage this even better than we are doing it right now.

[Operator]

Our next question comes from Christian Ehmann at Warburg Research.

[Christian Ehmann, Analyst]

I would like to go more into detail about the NASDAQ listing. So if you give me a short overview what your expectations for this. Do you plan on expanding your multiple? Do you plan on increasing equity? Do you favor debt in some cases to accelerate growth? This would be one question. And second one would be, you have shown and will continue to show, as you said, rapid growth in the future. What are your measurements or your measures to actually make this growth sustainable? And also keep the growing pains in check, if you felt like so.

[Enno Spillner, CFO & Member of Management Board]

Good. Then I may start with the NASDAQ reference here. And obviously maybe one immediate point as a reminder. So we are not under urgent pressure from a financing perspective. As I repeated, we have about EUR 450 million cash at hand and we also have a strong balance sheet, which we, at any time, could leverage in a different way than we are doing today. So in that regard, that's not urgent here. But the overall reason is a combination of different arguments. And as we just nicely described today, we are accelerating and increasing our operational exposure in the U.S. and here we feel it makes a lot of sense to combine this with a more capital markets focused exposure going in parallel tracks, becoming or increasing our visibility and perception in the U.S. markets from a capital market side as well as operations because also customers like, and partners like DoD, Bill & Melinda Gates, Merck and others obviously recognize these things and there it can be clearly supportive to our operational endeavors.Second, if you look at the structure of our shareholders, we have a lot of international shareholders. We have a lot of European-based shareholders. But what we would like to add is more U.S.-based investor exposure and in particular also getting more U.S.-based specialized institutional investors from the healthcare and life science arena, getting them on board and in that context obviously increasing the momentum within our share. On top of that, if we want to do this, we want to do this in a significant way. So really establishing so many ADS that this really builds a critical mass and momentum in the U.S. and this will probably also trigger certain proceeds, which we then would have at our hands to further secure and support the growth of the Evotec like the J.POD that Werner described, like the CapEx activities, like our equity portfolio growth. So there's many different areas where we keep investing, plus having strategic flexibility if need be and if there are good opportunities that we can observe. So it's a whole bunch, if you will, of good reasons. And just as a side remark, we are probably one of the last European biotech standing of this particular size that have not at least a double listing in the U.S.

[Werner Lanthaler, CEO & Member of Management Board]

Christian, to your question about growth pains, growth pains are the best pains that organizations can have. Nevertheless, one should never overstretch an organization. And that's why, for example, we have given ourselves one key measurement that quality has to be right at every moment in time and customer satisfaction and partner satisfaction has to be right at every moment in time. So the key number to monitor here is also a number that we publish, is retention rate and the number of people who continue to work with us despite the fact that an experiment doesn't deliver positive data because we are in -- they are in control of the process but not in control of the outcome.Having here a retention rate of more than 90% of our partners over the last years, and that number is constant or even growing, that shows us that we are controlling this to a level that quality is right. And we are absolutely not going for every opportunity in this growth market because that would then really stretch the organization to a limit where we don't want to go. But I totally understand and hear you because it would be the wrong strategy to grow too fast because if you go too fast, many companies have also gone against the wall, and that's clearly not the intention of Evotec. We go along with our partners and we deliver quality.

[Operator]

Our next question comes from Victoria English of MedNous.

[Victoria English]

Yes. I have 3 questions. Werner, the first one concerns your vision about being a producer of royalty, creating the largest royalty pool in the industry. At what point is your iceberg going to start delivering the regulatory approvals and the marketing that will enable these royalties to accumulate? That's the first question. The second question concerns your listing on NASDAQ. Do you intend to have a dual listing still, one in Europe and the other in the U.S.? And the third question concerns the protein degradation agreement with BMS. There are a group of companies out there that call themselves protech, dealing with protein degradation. Are you in that group? In other words, are you developing with BMS bi-functional molecules?

[Werner Lanthaler, CEO & Member of Management Board]

The first, when does the iceberg deliver?

[Victoria English]

Yes, that's it.

[Werner Lanthaler, CEO & Member of Management Board]

We don't expect -- we don't expect a royalty rate in our mid-term guidance at this stage within Action Plan 2025. But we see opportunities of compounds going to the market some times in the years '24, '25, '26 where then royalties will start to kick in. And P2X3 is such an important example here because once you have cleared at the quality levels, how Bayer does this, as Phase IIb translating into a Phase III, you can have a very high probability of such a compound to go to the market because this is a proven mechanism with P2X3 not only by Bayer, but also by Merck, U.S., for example, or other companies working on that mechanism. So the security level that royalties will come is going up. How many of these royalty streams are coming, that's then the next question. And this is why today with more than 130 co-owned assets, we of course are fully aware that there will be attrition along the way. But just imagine that there would be 2, 3, 4, 5 royalty flows coming into the company over next 10 years that basically have no cost against them, how this would boost our EBITDA levels to the upside.Yes, it will be a dual listing, coming to your second question. And when it comes to protein degradation or molecular glue companies that you're referring to, it's exactly what we have been doing over the last 5 years where we have built the largest farm of mass spectrometry equipment probably in the whole industry in our sites in Toulouse and where we are leading science out of Munich when it comes to protein degradation where you please should look back to an acquisition that Evotec made in the year -- I think it was 2012, 2013 -- out of the Munich-based proteomics company called Kinaxo, which is the heart of our protein degradation platform. So, yes, we are absolutely in this space, and we probably haven't positioned it large enough to the outside world, but it's really for us a mission where we are bringing protein degradation and all proteomics-based science forward that comes out of Kinaxo and is now industrialized on our platforms there.We have gone exclusive with BMS in a certain disease area, which is oncology driven as you can imagine. And we have expanded this now into another disease area. And unfortunately, we don't have as much capacity that we could sell because the demand for these approaches is really high because the scientific hope by drugging undruggable targets via PRROTECT is, of course, a big promise in the industry.

[Operator]

Our next question comes from Chris Redhead, goetzpartners.

[Christopher Ross Redhead, Analyst]

A couple of questions kind of just strikes to your sort of overall strategy. The first question is related to COVID and the idea that clearly we -- the world has done very well with vaccines in terms of developing vaccines and now there is this very strong focus on biologics and particularly antibodies for treating the disease rather than being a prophylactic. Now I know that -- so this is clearly, I understand to be a very, very big opportunity for you guys in terms of the J.POD model in terms of getting those sorts of things out there quickly and being able to respond quickly. Now people have talked very much. I know that the company has a very -- and Evotec particularly has a very strong sense of social responsibility. The people talk about vaccine apartheid in the world today where the developing world doesn't have the access to vaccines that it would have. But clearly J.POD, in terms of the ability to do biologics, has that ability to be able to be easily transferred in the way that you described. I'm just wondering how you kind of see that developing. And clearly, there's issues about patents and costing and pricing. So that was the first question. It's quite a long question, but I just wonder how you'd address that.

[Werner Lanthaler, CEO & Member of Management Board]

Yes. I think the first thing is you have to be technologically in the situation that you can manufacture biologics at cost levels that allow more access for more people, independent of all other questions that are coming with that. And that is the disruptive point about our J.HAL prediction platform translating into J.POD commercial manufacturing, that we will be able to have very efficient antibodies built if we can influence the way these antibodies look from the very beginning of the process. And that is -- I mean there is no beauty in COVID at all, but if there is any beauty, then it is really this great situation that we are in right now, that we are starting COVID therapeutics from the beginning and with this we can optimize them to a degree that the cost level behind them will allow big access, much more access than typically for antibodies where you know that the cost of an antibody starts north of EUR 5,000, typically, which, of course, when it comes to global access would be unthinkable for many countries in the second or in the third world. And I think this is really the power of J.POD that we will come to very flexible cost situation if we can optimize these antibodies.Which brings me to another part that the beauty of building biologics in infectious diseases is starting as we speak because so far, biologics in infectious diseases were basically unthinkable because of cost reasons. And I also think here that our chikungunya therapeutic antibody holds huge potential to prove that also for these diseases that typically occur in poor countries, we will be able to achieve cost levels for therapeutic antibodies that create markets here. Hepatitis B is the same when you think about the global reach that we want to achieve here with the biologic, but you first have to be able to have costs that allow you to really roll out these therapeutic antibodies. I hope that gives you color on how we think about that.

[Christopher Ross Redhead, Analyst]

Yes, that's great. Second question was related to ASU, which kind of relates to one of the questions that was previously. As you expand and as you develop this very large portfolio of royalty streams, there must be some prioritization within this royalty stream. I mean -- so how do you manage that prioritization? How do you -- is it -- there must be some difficult decisions in the sense of you look at -- you have a program with a very large partner that's worth a lot of money in other -- downstream or and another smaller partner where that particular project may not -- may have -- that particular project may have a higher value or -- how do you make that decision? Because that seems to me a very -- particularly as you grow larger, that's becoming more and more of an issue.

[Werner Lanthaler, CEO & Member of Management Board]

It's actually not an issue at all because the first is -- don't forget, it's always the same platforms where these assets are generated. Then there are 4,000 scientists at Evotec that are expert driven in, for example, neuroscience, oncology, metabolic diseases, inflammation, immunology, virology, antibacterials and global health. So you have groups of experts that are creating the priorities along the science in these disease areas. And the moment we partner something, our partner has to take over the diligence to bring a compound forward along the diligence clauses that we give to them. And that's the moment of prioritization because if our partner doesn't deliver on this diligence clause, the asset falls back to us and we can re-partner or develop a compound on our own with another partner. And again, it's this diligence clause to our partner that basically is ensuring that the royalty pool is moving forward at optimal speed because our partner has to commit to invest to do that.And the other thing is our partners are not strangers. These are typically the 20 pharma companies or the people who we know and work with. So there is typically a very long-term good relationship behind these partnerships that we are building and that's why the flow of information is guaranteed and also that's why we see that our partners really leverage the platform and that's why the pool can be not only leveraged with one partner, it can be leveraged through multiple partners out there. That's the principle of the shared economy that we are applying to R&D. And it's very simple if you look at it.

[Christopher Ross Redhead, Analyst]

So in the Innovate program, the -- in every case, the partner has sort of the golden vote on how fast it goes out, the triggers for each step of development. Is that the case that they -- it is completely given over to them that speed and you don't participate in that at all?

[Werner Lanthaler, CEO & Member of Management Board]

We -- in very many projects, we partner a project and still the platform where the science is generated is Evotec. So for example, when we are generating induced pluripotent stem cell, a neurodegenerative portfolio, our partner is BMS who is funding and who is running the clinical trials, but all the discovery and pre-clinical work is done on the platforms of Evotec. So here, we have full control, full insight and full visibility about the progress of projects. And with this also, we have, of course, full rights to prioritize projects that have higher and lower probabilities. But what is, of course, in the hands of our partners, if they pay, is their decision to say we take something forward or we don't take it forward with their costs that they have to bear to bring projects to the market. But the moment they don't pay anymore and they don't invest into a project anymore, everything that has been generated for such a project would fall back to us and then we can do, as I said before, a re-partnering with someone else and end. So that's why there is a very fair alignment between our partners and us that secures optimal speed to generate this royalty pool.

[Christopher Ross Redhead, Analyst]

So that -- in every case, whatever they've spent, if they stop spending, all the rights come back to you. Is that the case?

[Werner Lanthaler, CEO & Member of Management Board]

Yes.

[Christopher Ross Redhead, Analyst]

Okay. Fine. Okay. Great. That answers my question.

[Werner Lanthaler, CEO & Member of Management Board]

Big pleasure. And of course, maybe one last sentence today. The more competition around an asset that we partner, the better our position to enforce a stronger contract with higher diligence clauses. And that's why we typically don't partner if we do not have 2-term sheets on the table. That's one thing. And the second thing, we optimize our EVO Innovate transactions for royalty rates. We don't optimize them for upfront because, again, that's the vision of this company, to create a large royalty pool, not a large upfront pool only.

[Christopher Ross Redhead, Analyst]

Yes, because you're not cash starved, so you don't need the milestones, right. So...

[Werner Lanthaler, CEO & Member of Management Board]

We need them to achieve our profitability, but we are not cash starved.

[Christopher Ross Redhead, Analyst]

Yes. Unlike many other companies where the milestones are key drivers for their survival. Essentially because you have a relatively lower cost of capital, you can be more selective at what milestones you take, right. That's...

[Werner Lanthaler, CEO & Member of Management Board]

Perfect.

[Christopher Ross Redhead, Analyst]

Right.

[Werner Lanthaler, CEO & Member of Management Board]

Are there further questions? Because if there are no further questions...

[Operator]

No, we have not received further questions at this point.

[Werner Lanthaler, CEO & Member of Management Board]

Fantastic. If there are no further questions, let me thank all of you. Let me wish you all the best and I look forward to hearing from you soon again. And if there are any questions outside of this conference call, don't hesitate to contact Volker Braun or Gabi Hansen, who are always there to help you. All the very best.

[Operator]

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