Evotec SE (EVO) 2023 Q4 法說會逐字稿

Thank you, Moritz, and good day. Good morning to all of you on the call. I'm sure you all have seen our press release on our 2023 results this morning as well as the announcement last night on the appointment of Dr. Christian Wojczewski, who will be our new CEO as of July 1. This development is the reason why we also have Iris Löw-Friedrich, our Chairwoman of the Supervisory Board with us on the call today.

But before we go there, it's my obligation to familiarize you with the cautionary language we have outlined on page 2. But now, without further ado, I would like to hand over to Iris. Please, Iris, the floor is yours.

Yeah, Volker. Thank you very much and a very warm welcome to all of you. Also from my side. We are ready to win the future for Evotec. Our core offerings are in high demand. Our business model is solid, business is growing. We focus on profitability. And most importantly, we have a super strong team in place, and we are strengthening the leadership in Evotec further. And that's the reason why I participate as the Chair of the Supervisory Board in a regular full year's results call today.

So with me today are Laetitia Rouxel, our Chief Financial Officer, who will cover the review on Evotec's performance in 2023; followed by Matthias Evers, our Chief Business Officer, who will guide you through the rationale and the details of the reset of the company's priorities for the coming year; our Chief Operating Officer, Craig Johnstone; and our Chief Scientific Officer, Cord Dhormann. We'll stand by to answer any questions you may want to address to them during the Q&A session.

I have the duty to excuse Mario Polywka, our interim CEO, who is ill today, and unfortunately not able to participate in this call. So we sent him our best wishes for recovery. I would like to deeply thank Laetitia and Matthias for stepping in for Mario on short notice.

Before we move to operational topics, please allow me to share the good news on the Supervisory Board's actions taken during the last close to four months, these efforts have led to the successful appointment of Dr. Christian Wojczewski, as our new CEO; and Aurélie Dalbiez, as the newly created management board role of a Chief People Officer.

A few words about the new CEO. The Evotec turnaround starts with a high-performing team at the top. If I can speak about myself, but I know it's also on behalf of the entire Supervisory Board, we all feel highly accountable to drive the reset of the company, starting with the best leader for the further evolution of Evotec with all the relevant stakeholders in mind.

We are confident that we have made the right choice. We reviewed a wide slate of diverse internal and external candidates. We ran a structured interview process with more than 10 candidates and an in-depth in-person workshop with the five finalists. We pressure tested their approach to our business. We tested their strategic competency, their operational execution, their experience, and of course, their leadership skills.

The appointment of Christian Wojczewski as the new CEO of Evotec underscores our determination to drive a turnaround with a focus on profitability, efficiency, and highest performance while of course, we need to further evolve the excellent science in all businesses of Evotec. Christian Wojczewski comes with an impressive track record of successful transformational change in the life sciences business, the creation of high-performing organizations, and a clear focus on profitable growth.

He demonstrated his strategic and operational leadership skills at the Executive Board of Linde, where he transformed the healthcare business into a global market leader with sales tripled and leading EBITDA margins. As the CEO of mediq, he transformed the business from a distribution model to a service model with streamlined business processes, a focused portfolio, and a high-performance culture. All of this resulted in a turnaround towards profitable growth. And these experiences will of course, benefit Evotec greatly. So Christian is an accomplished leader, who will make Evotec fit for a prosperous future.

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

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

Thank you, Iris, and a warm welcome to all of you for joining us today to dive into our performance of the financial year 2023. It was a very intense year for Evotec. It started off extremely strong. We expanded and extended two collaborations with BMS and we're able to win Janssen as a strong partner in the field of oncology. On April 6, we have been hit by the cyber incident that had led to EUR70 million missed revenue in 2023, luckily in Q2.

Despite all the challenges we could celebrate successes, with Just signing a technology alliance with Sandoz in May, validating the Just value proposition. Through our focused, efforts, we have seen a strong recovery of the business in Q3, turning back to 80% of operations with a strong revenue growth of 13%. In Q4, we faced a challenging market environment that was still masked by positive contribution from the fading cyber incident recovery.

With that said, let us take a look at the full year results. We are pleased to report that our revised guidance for 2023 was fully achieved. Our group revenues for the year were EUR781.4 million in the upper range of EUR750 million to EUR790 million, as we had projected. Unpartnered R&D expenses totaled EUR64.8 million, falling within our estimated range of EUR60 million to EUR70 million, and reflected our continued focus on innovation and growth. The adjusted EBITDA for the year was EUR66.4 million, meeting our guidance range of EUR60 million to EUR80 million.

As just mentioned, we achieved EUR781.4 million revenue in 2023, a solid 4% increase compared to the previous year and despite facing significant operational cyber related impacts for the majority of Q2. These headwinds, mainly in our development in Cyprotex business were more than offset by the strong performance from our key strategic partnerships. Notably, revenue from Just-Evotec Biologics reached EUR108.4 million, reflecting a remarkable growth of more than 110% compared to the prior year. These substantial increase underscores the success of our partnerships, especially with Sandoz and the strengthening of our portfolio.

Our gross margin experienced some pressure, declining slightly to 22.6% from 23.2%, due to the cyber incident, development market challenges, the ramp-up of capacity at Just-Evotec Biologics, and excluding JEB's gross margin, would have been -- was 27%. We remain committed to investing in the future with unpartnered R&D expenses of EUR64.8 million as we continue to drive innovation.

Adjusted group EBITDA for the year was EUR66.4 million, marking a 34% decline from last year, largely due to nonrecoverable business and reduced capacity utilization in Q2, one from cyber related costs included in EBITDA represent EUR26.5 million. Excluding Just-Evotec Biologics, adjusted group EBITDA would be at EUR72.7 million with Execute absorbing most of cyber related expenses. Furthermore, we are proud to have made significant strides in sustainability, reducing our scope 1 and 2 emissions by 29% to 27,480 tonnes CO2 equivalent as we are growing greener.

As outlined on the previous slide, Innovate has an excellent growth of more than 30% despite the challenges we faced. Main drivers for this positive development, were the extension and expansion of contracts with BMS in neurodegeneration as well as in target protein degradation. Also new collaboration with Janssen in cell therapy as well as the tech alliance with Sandoz demonstrates the demand for differentiated and paradigm shifting technology platform is very robust and a truly distinctive factor in the overall challenging market.

As we indicate here on this slide as well, our full sales funnel has grown significantly across shared R&D and particularly also since validation of our Just-Evotec Biologics CDMO offering. A substantial part of these opportunities sits in early funnel stages, and we are working hard on conversion, winning this new partnership and translating this into revenues in later '24 and '25. Total Execute segment, including Inter-segment's revenue, had stable revenues at EUR738.7 million, driven by the Sandoz collaboration yielding a gross margin of 20.9%. Innovate segment's revenue was EUR266.9 million in 2023, reflecting a gross margin of 30.8%.

Despite the strong challenges, this year we achieved 4% organic growth in group revenues. As mentioned Just-Evotec Biologics' revenue rose by 111%, demonstrating exceptional growth driven by the collaboration with Sandoz. Innovate reported a 30% increase, showing strong momentum attributable mainly to BMS and other key strategic partnerships.

As we mentioned in our previous calls, Execute was mostly adversely impacted by the voluntary shutdown of our operations in response to the cyber incident and the softening market towards the end of the year. However, overall segment revenues for Execute grew year-over-year, inclusive of Inter-segment's revenues as we reallocated resources towards supporting high value partnership within the Innovate segments. Despite the lower contribution from milestones, upfront, and licensees, our diverse business model continues to show its robustness, maintaining a solid gross margin of 27% excluding Just Biologics.

Focusing on Q4. Group revenue were EUR201.3 million, reflecting a 16.4% decline compared to the strong comparable base in 2022. While in the challenging market, positive contribution were related to BMS Celgene programs and the successful delivery of work packages as part of our new technology partnership with Sandoz.

It's important to note that the revenue mix had a very different structure as opposed to Q4 2022. Contribution for milestone to the tune of EUR17.7 million were significant in the last year's quarter, while Q4 '23 was a rather modest period with milestones and upfront payment reaching EUR1.2 million. Also Q4 '22 saw the one-off effect of royalty income from SKB of about EUR2 million, which had a positive effect on margins too.

Gross margin contracted to 18.7% compared to a robust quarter of previous year, influenced by the overhang of losses during the cyber incident, challenging market conditions, unfavorable sales mix, and reduced milestones upfront and licensees payment, and ramp-up of the cost of Just-Evotec Biologics also impact the margin while showing our commitment for the future growth.

Switching now our focus to cost management. R&D expenses were EUR20.2 million for the quarter, 5.4% lower than the comparable prior year period. This decrease was influenced by a temporary reduction in R&D costs seen from the cyber incident, but still indicate our strong dedication to innovation.

Our adjusted group EBITDA, which does not include external one-off cyber related cost, for the last quarter of 2023 represents EUR16.5 million compared to EUR57.1 million in Q4 2022. While the gap is significant, I want to recall that Q4 '22 was the strongest quarter in Evotec history by a wide margin and year-over-year comparison needs to be seen in that context.

The negative development in Q4 '23 triggered the need for comprehensive review of the business. Together with Mario, we therefore initiated an in-depth analysis to assess measures needed to foster a sustainable, profitable growth in the future. With that, I would like to hand over to Matthias, to share with you our thought process, findings, and decision on actions to be taken.

Great. Thank you very much, Laetitia. Good morning, good afternoon also from my side. Basically, as information about the developments in Q4 materialize, we launched this structure performance review, looking closely at the external environment as well as our inner workings. Let me share with you the top-level results today in form of a SWOT analysis, and I will basically walk from the bottom to the top. So I start with the more external oriented dimensions, opportunities, and threats, and then to the strengths and weaknesses.

Opportunities. And I start there for an, hopefully an obvious reason, because we face very strong demand and opportunities in terms of expanding our human data centric multi-omics approach to R&D. Here, mentioned the inpatient molecule patient database, which is at the heart of our PanOmics efforts. Clearly, and it has been behind the numbers and my colleague, Laetitia mentioned it, we have seen the commercial validation of Just-Evotec Biologics. We see -- have seen an increasing demand. We have fully -- can fully capitalize on it. We have a full sales order book.

We are quite careful to describe the US BIO-SECURE bill as an opportunity. We just want to signal; we are here for the partners in the US to collaborate with them with our global footprint. When it comes to threats, we describe the market at this point of time as a buyer's market with more challenging dynamics. I will go later in the presentation a little bit into the drivers, but it's fair to say that particular for biotech companies 2023 and now 2024 has been a difficult environment. So we see a market recovery towards 2025, and that is of course as stated, a threat.

Let me move to our strengths. And here I want to be very clear that our scientific expertise combined with our track record, our differentiating capabilities on our integrated end-to-end platform lead to very strong demand that has led to double-digit growth, has to -- lead to an expansion of our sales pipeline. We see a demand for this, including and leading to customer retention rates north of 90%. There's clearly a weakness identified, and I will come also in this presentation with our response against it. But to put it plainly, we have found an internal complexity and operational inefficiencies that we are targeting now head on.

When it comes to our capacity, there's a temporary mismatch because we have seen the softening in the more transactional parts of our business. So we have to call it temporary, something that we can repair quite quickly, and we have a plan for that.

With that, let me move to the next chapter of this presentation, which is about the priority reset we are introducing here today. And then Laetitia will continue later on guidance and outlook.

As we talk about new priorities, I think it's very important we put those into external context. As promised, I want to talk a little bit more about how we see the market today. Clearly there is demand, but we have seen cost containment on the biotech side on the big pharma side and what is for us relevant to say, we have less Series A, Series B events. And so roughly 40% of our business sits in biotech, and that share has gone down a bit because there's simply less new starts in the biotech segment.

Overall, I think the market summary is that the effort towards conversion and towards winning business is higher and we have seen that also in our peer group performance. In summary, I would conclude that we see green shoots in a market. Like competitors, we see that more towards the end of the year into 2025 and see this type of market environment as a context for the priorities I am now introducing.

If we move on. We as an organization, clearly commit to three priorities under the header towards profitable growth. So we are clearly a company growing at double digit following this demand, but this growth has to be profitable.

Priority number one, clearly, and I will detail it in a second, just wait -- I will detail it in a second, deals with our focusing on what we are good at and driving smart partnering. Secondly, we are now adjusting our organization and footprint. And number three, we put the strongest possible team in place for today, focusing on the Management Board, but of course, going beyond.

Now indeed, let me double click a little bit into the first priority. You see here two illustrative analyses of where the money is going in deal making, one by therapeutic area, one by modality. And in short, it's fair to say we have massive opportunities as we are well aligned against these areas, let's say, in oncology, neurology, cardiovascular, or in the core modalities.

What we are doing here is doubling down -- and I would call these actions our gross program because it's a careful alignment. So to become a little bit more specific, an example is for instance, metabolics obesity that we align our efforts in R&D, our strengths against where the market demand is.

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

Thank you, Matthias. Resetting our focus and offering to a changing environment comes with the need to adjust our organization and footprint to the new realities. Our restructuring focuses are on three targets: one, optimization of our organizational structure and operational model. Two, adjustment of our footprint and capacity optimization. And three, as well as improving the efficiency of our enabling function.

We completed the diagnostic, and we are now working with full effort on multiple key levers. As a result, we expect to generate visible margin improvements over the coming years. The measures identified at this stage should result in an annualized benefit on EBITDA of more than EUR40 million. For 2024, we will see a pro rata effect and expect to see a first full impact by 2025.

I would highlight our effort in three key levers there. In procurement, for instance, we aim to leverage our global scale, harmonize and optimize pricing for the good and services we are buying and rationalize diversity in what we buy. They maybe low-hanging fruit, but they require flawless execution that we commit to. Second, focusing on the right sizing capacity with the right expertise. And thirdly, simplify internal structure like the new segments reporting, which bring us to the next slide where we are grouping the former Innovate and Execute offerings, excluding Just Biologics, into our end-to-end platform serving 500 plus partners.

This segment will be called shared R&D. With that, we reduced the recognition of intersegment revenues of meanwhile, more than EUR200 million. This will reduce redundancies of internal structures and will lead to more efficient and leaner processes. The new segment reporting will also give better transparency to Just Biologics, in line with what we heard during our past interactions with you. The new structure will be in place as of Q1 2024 reporting, and we will provide more detailed information on comparable numbers versus 2023 in due course.

Talking about the start of the year, which in essence saw a continuation of the patterns we saw during Q4, let me share our view on our expectations for 2024. At this stage, we expect revenue growth to remain robust at low double-digit rates, while the mix is set to change versus prior years. Just Biologics, as well as differentiated offerings will drive the business, while more transactional businesses are likely facing a challenging environment this year.

To show growth more favorable business mix as well as our efficiency, improvement measures on EBITDA are the basis to assume that EBITDA will grow middle double digits. Further details of refined guidance will be dependent on the overall market environment, win rates of existing leads, and new collaboration, and phasing of the efficiency gains in 2024.

To recap, I want to emphasize on our strengths in revenue growth while we focus on driving profitability. The structure of our revenue mix suggests that growth at Just-Evotec Biologics will be faster than in shared R&D in the coming years. At this stage, we expect a stable growth of revenue related to milestone and royalty payments given the growing breadth and depth of our portfolio. For 2025, we expect the double-digit revenue growth at which, to continue bringing us into the ballpark of EUR1 billion revenue.

In general, we anticipate the midterm growth profile to remain similar to patterns in the past. As we are here for the long term, we expect a more favorable revenue mix and more efficient structures to build the basis for the very profitable growth. The details of this new midterm outlook will be assessed together with Christian, and we plan to provide the first update also in August.

As Iris mentioned already, we can say that our Supervisory Board successfully executed with regard to priority three on our list, which is strengthening our internal team, and we look forward to working together with Christian and Aurélie to shape Evotec sustainable growth path into the future. They represent two important additions, as an example of how important it is for us to focus on talents and fostering expertise at Evotec.

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

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

Peter Verdult, Citi.

Thank you. Peter Verdult here from Citi. Lots to discuss. I'll restrict myself, I beg your patience, to three questions around the topics to cover. Maybe just starting with Laetitia. This will also take the time on the guidance you provided for '24 and some of the comments you're making about '25. I mean, I try and quantify it, it looks like you're promising the market at least EUR100 million in EBITDA in '24 and EUR200 million plus in 2025. So the key question for myself, as well as shareholders or potential investors, I guess, what you expected today, is just assessing well, any sort of types of risks here.

So my question bluntly is, how do you basically catch and sense the numbers to reflect in market environment and also, to ensure that Christian has a smooth start as the new CEO, mainly due to the push on all of these dynamics or what you're seeing in terms of customer conversations around BIO-SECURE that would give us more confidence that there's no further downside risks.

Just mainly to Laetitia, you gave your acknowledgement many times in terms of how we got that EUR300 million, the base business, biologics, profitability, and assumptions and milestones. Is there anything in particular that's the series, I mean, is there a little everything? But can you just move us through exactly where that shortfall comes, because it feels like your EBIT -- your revenue or like, it's not hugely different to where the market currently is.

And then lastly, maybe for Iris, like when speaking about Evotec with potential investors, they always raise the concerns around regulatory risks, given the actions of the prior CEO. When can we draw a line and when do we expect to hear from Bob and whether they're applying that this really was the action of the bad actor, or that he messed, or then they could send that to systemic factors? So could you address the regulatory risk concerns that often comes up when discussing Evotec with investors? Thank you.

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

Hey, Peter, greetings. We must admit, the voice line was -- it was hard to get all the details. We will start, and please feel free to follow-up with questions. I mean, it's an important discussion, so please bear with us.

I think that at the heart of the question, we heard of course, are we basically suggesting EUR100 million, and what happened basically in multiple ways? So let's maybe restate a couple of assumptions. Number one is, we see uncertainty at this point of time, given what we have observed from that review. And yes, we want to give the new CEO a chance to review where we stand in the business. And so yes, that's why we are actually giving only qualitative guidance at this moment of time.

Ballpark-wise, I think your right level wise. I mean, that's what we are signaling in terms of EUR100 million and upwards, but we give qualitative guidance at this moment of time. The underlying big question is of course, what happened. Now, I think softening of other more transactional parts in the business, we started articulating in Q3. I think in the November discussion we had very particular pointed out development, and that has two, three drivers. That was of course, coming back out of the effects of the cyber-attack most hardened -- the hardest in the GMP area. There was also a part of a very bad biotech environment where we basically see a hit on our transactional business. So, and that was a bit overshadowed by the business coming back as a hockey stick after the recovery.

So we see the full effect in Q1, and that's why I've been trying to outline the distinction between the high demand for our strategic, we now more and more call the pipeline co-creation offering. We see recovery and we are clearly in the game with a very specific value proposition. And I give you one green shot, that's our INDiGO offering, where we provide end-to-end development offerings for biotech and see green shots, but we see also at this moment of time, given market and given that situation, high uncertainty plus CEO. That's basically the answer why we give that qualitative guidance at this moment of time.

Laetitia any additional comments or Peter come back if we missed nuances, because again, it was a little bit hard to hear before we move to Iris.

I'll get back in the queue. And I'll come back, but let's hear it for Iris.

Thank you.

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

Thank you.

Next question, please.

Charles Weston, RBC.

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

And then lastly, at the lower end of the revenue guidance, essentially no growth in the business, overall, if we add back the EUR70 million of lost revenues for Q2. So we sort of reset that base. Alternatively, we could look at this as a significant decline in lots of -- in the non-Just-Evotec Biologics business. So can you help us just by perhaps giving us some numbers and guidance around how much of the business you classify as transactional and how much is sort of more value add, and perhaps out of the revenue growth that you've told us kind of what the dynamics might be in those two businesses, how much could transaction be down in 2025 -- 2024, sorry.

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

Charles, thank you. This is of course, a very important question, and let me try to answer it in a simple way from two sides. And I start with the backend of your question because you are saying, is that the factor a decline, including the EUR70 million. We talked about it as an estimated effect or revenue lost from cyber. I think, first, let me turn around that statement a bit and say, we basically, in 2023, we delivered revenue growth more or less within a highly impacted quarter operationally. So we delivered growth. It's too simple to say it was nine months, but for simplicity's sake, with the last quarter we delivered growth.

Now, to transition back to the new base, it's a little bit harder than just saying our operations are back, because particular in development and in the Cyprotex business, we have to basically regrow the sales pipeline. And I mean, it's like we lost a little bit the momentum and we see the buildup, but it will take some time. So we are not giving up the numbers. We are not giving up the demand, but it will easily take six, nine months to rebuild that momentum. So we cannot just switch the business back on. Its particular relevant and also in the very fast moving transactional Cyprotex business, which is our ADME-Tox solution.

So I want to acknowledge your point. Because if we let the numbers speak, it's of course, if you would include the EUR70 million, a much more moderate growth, but we see it as significant double-digit growth versus our 2023 base, because we have to rebuild that momentum.

Your first part of the question, what is moving, what is shifting, and the need for example. So first of all, we see a buyer's market dynamic. What is that? We see less incoming requests. So there's less demand. What is that? 40% of our business were biotech. Now, if you look at the first funding event, so new biotechs is basically back to 2014-2015 levels many call, many analysts call. 2023, the worst year in biotech, and that effect is visible for us. So we have seen the share of biotech from roughly 40% going down to 34%, and that is of course, one contributor. Second contributor, in a world where of cost constrained in share price pressure, I think the procurement dynamics are more significant.

So yes, there's price pressure. We hold up well. Our win rate is significant, but the effort to win, it takes longer. So there are slower conversions. So we would talk a bit more about deceleration of our business versus losing, while there is competitive pressure on price points. That together leads us to a very strong conviction that we get basically continuous double-digit growth, but we don't see fully the point just to switch back to EUR70 million and start from a larger base. Hopefully that addresses those point, Charles, and then I give it further to Laetitia.

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

Yes. So 20% will be -- could be down, potentially down substantially, Just Biologics up substantially, and then the other -- the rest of sort of Execute and Innovate could be up.

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

As a percentage?

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

Okay. Thank you.

Michael Ryskin, Bank of America.

Thanks, sir. Thanks for taking my question. I want to follow-up a little bit first with something on the underlying market conditions. I hear you that 2023 was a challenging year, and that funding still remains low, especially for biotechs. But I think also where we're actually hearing early commentary of improving market conditions already of more proposals, more requests for outsourcing, because 1Q was a very good quarter. So that's giving people some confidence that 2024 is a recovery year.

It seems like you're still a little bit more cautious. Is there any reason you're not seeing some of those proposals and some of that requests done yet? Is it, in a real way to put what you're talking about in terms of getting the business back on track? And if that's the case, what gives you confidence that this isn't a permanent share shift or share loss?

Thank you for the question. It's very good and takes another lens at the market. So we hear that as well and I talked a little bit about green shots. We are indeed a little bit more careful. So we observe I mean, if I'm a little bit more specific than before, in terms of steep ramps. We see an improved climate and there are new entities being formed and we see requests.

Now do we see an uptick on Series A, Series B already? No, I think the mass and the market intelligence is very clear on that. So do we see a big pharma acquisitions as access points for biotech? Absolutely, yes. Do we see external outsourcing ideas? All sort. But in aggregate and given the scale of our business, we are indeed a little bit more careful, because we are also sometimes feel there's a little bit of wishful thinking on very early signals and that's the last thing we want to do.

So we want to be very transparent on the demand logic of our business, which I think we summarized here strong demand on strategic parts, some more deceleration or, call it, harder conversion on our transactional part. And this allows me also to very clearly repeat that high double-digit growth, similar growth for our Just-Evotec Biologics business, where we rather face the topic of capacity constraints more than anything else.

Okay. All right. That's helpful. And then my follow-up question is on the right sizing that you talked about, the reset of profitable growth. You talked about annualized EBITDA improvement of greater than EUR40 million over time. Could you provide any more clarity on where you're doing some of that right sizing? You talked a little bit about trimming the unpartnered R&D, but EUR40 million is a pretty meaningful improvement in EBITDA. So any particular areas, any particular product offerings, that would be helpful. Thanks.

Okay. Laetitia will take that question.

So regarding the optimization cost structure that we have in mind. The EUR40 million we share today with you, I would be a bit more precise, is not less than EUR40 million, it's above EUR40 million and it's an annualized figure. So obviously, we will not be able in 2024 to generate the full scope of those savings, but this is expected for 2025 in full. So I think it answers your first question when we will get this amount in the financial. So expect a full impact in 2025. And heading in 2024, we are working with internal and external stakeholders to fine tune, and we'll come back in the mid-year results with you to go with more precise numbers. But of course, we will have factored some of those savings already this year.

Then coming on the area we are looking at in -- and I will repeat a little bit what we said just before. It's one around the organizational structure and the operating model that we have that now we are forging the segments; we get more efficiency. It doesn't change anything on the quality of what we deliver to our customers. It's really internal optimization to be more optimized in what we deliver from a cost perspective and efficiency overall for our people.

The second area is around the footprint and the capacity optimization. Of course, it's really a topic that we are looking at in the light of what's the market dynamic and we are obviously looking at matching our current operations and capacities with what the market dynamic is. But of course, it doesn't jeopardize any of the contracts we have currently that we have capacity to deliver, of course.

And then the other area. So we are looking at is around the enabling function efficiency. And there you have different part of the exercise, I mentioned the procurement area, which is a low-hanging fruit. I would say relatively simple topic. It's a non-people topic. But we have really to make that efficient this year. And I think it's really something that will generate already in 2024, some savings. So it's on the part of the non-people related.

And then I would say related to our organization, the footprint and the capacity optimization as much as well as the enabling function efficiency organization will come with people reduction overall and hiring plan review based on the exercise and the review we are currently running. So I would say it falls into buy or buying power or buying cost that we want to optimize our footprint, that we all saw some fixed cost on our footprint that adapted at the current situation and people cost. I would say that would be around those three main areas that we see the savings coming from.

Okay. All right. Thank you.

Jacqueline Kisa, TD Cowen.

Hi, this is Jacqueline Kisa on for Steven Mah at TD Cowen. Thank you for taking the questions. The BIO-SECURE act previously named companies like WuXi Biologics as companies of concern. Has this impacted business development discussion with your customers and if so, have those customers been across the board or more with emerging biotech?

And then with regards to your J.POD facility, could you update us on the current operating capacity of the facility? And do you expect to have the capacity to take in new customers in the event there is a shift from WuXi? And then finally, when do we expect the operating J.POD facility to reach scale? Thank you.

All three questions are directed towards Matthias.

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

When it's on the discovery and development side in our core business, it's early days, but we see, I would say we are carefully optimistic also on the big pharma side. So with the US players, with big exposure to Asia, that there's a slow process and we are ready to serve them. Now, when it comes to J.POD particularly, and in terms of new capacity. So first of all, I'm happy to report that we are of course, fully on track to launch our J. POD 2 in Toulouse. I think we are planning for a grand opening in September, and this will add substantial capacity.

And yes, we are ready to serve new partners, absolutely, because we want to bring in molecules and bring in molecules quickly to commercial stage onto our platform. So the answer is yes, but the message also to our partners, but I'm happy to give that message here. I mean, when partners are constrained, now is the time to invest and put money behind the demand where we can be of course, partners to expand capacity for further partners. It could be additional trends or additional facilities down the road. Hopefully that covers --?

Okay. Thank you.

Go to the next question.

Falko Friedrichs, Deutsche Bank.

Thank you for taking my questions. Good afternoon. My first question, thank you for providing us with a sort of a rough ballpark number for EBITDA in 2024. Could we do the same exercise for 2025, please? It's super difficult from the outside right now to pinpoint where you could land considering all of these different moving parts and your kitchen sinking exercise here. So is it fair that sort of the EUR250 million market expectation is still in play when including the EUR40 million of savings or would you point us to a lower number?

Then secondly, you mentioned that this temporary mismatch of demand versus capacities, that this could be fixed relatively quickly. Can you add a little bit more color here? Sort of are we speaking about a few months or is it something over the next two to three years, that would be super helpful.

And then my third question, I think it would give all of us a bit more comfort if you could share if the new CEO has been involved in this type of guidance exercise you've done at all at this point, I just want to make sure that we're not sitting here again in the middle of August and instead of EUR100 million, we're speaking about EUR80 million. So maybe we can -- you can share a little bit more to what extent the new CEO was involved? Thank you.

Thank you, Fako. I take the liberty to take the first question then on demand and capacity. I guess Craig will take it together with Mattias. And with regard to the involvement of Christian, a few words from Iris, but I guess I know the answer already, but we will see.

So on the 2025 guidance, no, it's not a guidance. Has never been, by the way, has always been an outlook, a midterm outlook. And you heard Laetitia saying that the EUR1 billion is still within reach with a double-digit growth in the next two years. And then we need to adjust the cost structure accordingly, and then we will see where we end, and we will provide an update by mid this year in August together with the entire team. So please bear. Craig?

Thanks for the question. So in terms of the rightsizing and the balance between demand and capacity and addressing the overcapacity. Of course, we have a number of threads to that rebalancing and cost saving exercises, Laetitia alluded. One of the -- there are some aspects which can be conducted relatively rapidly, such as a reduction in physical footprint and bringing certain facilities into a fallow state, for example, and that saves a lot of energy and that can be relatively rapid.

But on the other hand, where were come into headcount reductions, we've got to follow the various social processes and laws in the countries in which we operate. And of course, that varies from country to country, but is generally in Europe, relatively slow and cautious because of various employee and processes, which means that it will take some months as we work through the full details of our plans first of all, per works council engagements and then decisions and implementations, which will take much of 2024, which is why we're indicating that there will be pro rata guidance in 2024 and then full year impact only in 2025.

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

Okay. Thank you.

Peter Verdult from Citi.

Sorry, it's Peter from Citi. Just a couple of follow-ups, hopefully the line is clear now. Just maybe from the materials, as Laetitia prior communication was for Just-Biologics to reach profitability in 2025 and, I think, you were nearly there in this in 2023, but I'm also sensing there's increased investment you have to lose coming online. So just wanted to sense your -- the blunt question, when do you expect Just-Biologics to reach profitability? I'll pause there and follow-up with my second question.

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

Okay. And my second question and I'm just -- sorry, to labor the point. But in terms of order book and, again, you've been making some quite confident statements around revenue outlook and perhaps being able to achieve that EUR1 billion revenue target still in '25. Could you remind us, I mean, you give this number, but you said in the past that your order book in biologics is 600 to 700, if not more. But could you give us a sense how the order book is looking across the broader business, just to give -- especially given that we're now four, or five months into the year, just confidence in a EUR100 million EBITDA number for 2024. Thank you.

Let's try from a few angles, Peter. So let's start in the area of Just-Evotec Biologics. So last year I've seen is that we reached EUR850 million. I mean, I think we disclosed that in November. And I think at this moment of time, we are happy to talk about that we reached the EUR900 million and we are growing from there. So we were confident that we stay with our projections for that part of the business as similar as I indicated before ballpark growth area.

I think when it comes to our sales order book, we are also trying to signal today that we are absolutely confident by when we look at our full sales pipeline, that's why we have shifted showing that. I mean that's a pipeline from early stages with low probability all the way to close to confirmed deals. And there we see a growing -- double digit growing demand that gives us confidence to make the qualitative statement on double digit revenue growth and yes, the EUR1 billion with that is in insights.

Thank you.

Naresh Chouhan, Intron Health.

Hi, there. Thanks for taking my questions. Just a follow up question to Peter actually on order book. If I could be a bit more specific. So as I understand around 60% of execute revenues are not API and ADME-Tox to the more higher value add longer-term contracts with much better funded partners. So the biotech issue should be much less of an issue in that part of the business.

We're now halfway, almost halfway through 2024. Can you give a sense as to how the order book in that part of your business looks and should we continue to -- have you got visibility of growth into 2025 in that part of the business? And that would be very helpful for us to understand what level of confidence and how much visibility you have, because obviously those contracts are 12 to 18 months if, as they roll off that business all starts decline, then it's a very different outlook. So some comfort on that would be very helpful.

And then secondly, on Just, as I understand it, there were EUR33 million of revenues in from Just in Q4, where the vast majority were in J. DISCOVERY, which means that the J. POD in Seattle is pretty much empty, haven't been up and running for quite some time. So can you help us understand what's going on and why you have no production in the J. PODs, please? Thank you.

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

All right. I will try to clarify a little bit how our Just-Evotec Biologics business actually looks like, and I'm excluding our capabilities on the discovery side. I really focused on the core process development, CMC, clinical supply, and commercial manufacturing part. Our value proposition is that we have the ability with AI-based models on data streams to look at antibodies and optimize them for developmentability and manufacturability. Then we design -- we have a very strong reputation and track record on the process development side, then to get ready as antibody for clinical supply, then for commercial supply.

So to establish the bookends, no, we don't have a commercial molecule just yet that gives us full leverage of the J. POD capacity. We have always stated that we are looking at 2026, 2027, so the outer years, where we have the commercial molecule, which gives us of course, higher leverage and higher revenues and higher profitability, At this moment of time, yes, it's not empty because we have clinical supply for our -- for example, for our biotech customers, we work with biotech, we work with DoD, we work with Sanofi. And yes, we have strong leverage of our process development capability because we have a pipeline deal, a tech deal, with Sanofi, for instance, where we develop a portfolio of biosimilars. So that hopefully cost-corrects a little bit what is empty and what is not. I would rather call it; our capacities are rather full and constrained as we are growing into the signed-up work. And we are focusing on process development, and we will get further leverage in the future through commercial production.

Okay. Thank you.

Joseph Hedden, Rx Securities.

Hi, good afternoon. Thanks for taking my question. It's just a milestone. As it was clear that 2023 was a weaker year than 2022 from milestones and appreciate that you've never and can't give guidance on levels of expected milestones. But I mean, perhaps just to steer on -- do you have an idea of more expected this year? from the major partnerships from the Innovate side of the pipeline, could we see a significant uptake there? Thanks.

Laetitia will take that one.

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

Okay. Thank you, Laetitia.

Charles Weston, RBC.

Hi, thanks for taking my follow-up. Just one please on the Sandoz product development deal. How is that going? How many of the programs have bit of kicked off? Was there progress, do you have any setbacks? And what's the potential revenue phasing for the Sandoz contract over the next few years, please?

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

Okay. Thank you.

So there are no further questions at this time, so I would hand back for any closing remarks.

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