Evotec SE

Ladies and gentlemen, welcome to the ABUTEC SE half-year report 2024 conference call. I am Judith, the course call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Volker Braun. Please, go ahead, sir.

Thank you, Judith, and good day, good morning to all of you attending our H1-2024 results call today. I trust that you all have seen our press release this morning and that you have had a chance to take a look into the report already, which we will discuss in more detail in the coming hour. Before we go there, it's my obligation to make you aware of the cautionary language as outlined on page two. But now I would like to hand over to Christian Wojciechowski, our CEO, to guide you through the deck that we have prepared for today's call. And please, Christian, the floor is yours.

Thank you, Volker, and welcome to everyone on the call. Before I share the agenda with you, I would like to introduce you to the participants in today's call. So here with me in the room, we've got Letizia Wicksell, our CFO. We've got Greg Johnston, COO. Kurt Dormann, CSO. Matthias Evers, CBO on the call as well. Aurélie, DBS, CPO. Special thanks also to my colleagues from the management board. They did a tremendous job onboarding me during my first month at Evotech. Letizia and I will guide you through the slides. And as Judith mentioned at the end of our presentation, We will have a dedicated Q&A session. So the entire team here is available to answer your questions. We will cover three topics in this call. The business revenue, including the first half year results, followed by an operational update. Finally, a follow up on our priority reset, which was announced earlier this year, and which will include further comments on the renewed outlook. Let me start the business update with a few words about what I found at Evotech just after a few weeks in the business. Our company over the past years has evolved into a true R&D powerhouse. Three elements in particularly make Evotech unique. Firstly, our people. The dedication of our world-class talent base is simply impressive. With almost 5,000 highly experienced employees, we have a strong scientific, innovative, and creative capacity. Secondly, the quality of our leading edge technologies and platforms. They allow us to bring R&D to the next performance level, and we go beyond the obvious. Thirdly, the deep partnerships with top pharma and biotech. Evotech has year over year demonstrated outstanding quality of services to our partners resulting in high levels of repeat business, long-term and integrated deals, and a spotless reputation of quality and innovation in the market. EvoTech is well positioned in a structural growth market. However, this year, we're facing a challenging market environment, and we will have to better leverage on our strength in the future. I will go into more details during this presentation. Let me first highlight the results for the first six months, 2024, which we have published today. In the first half of 2024, our group revenues increased by 2% to 390.8 million euro, versus the comparable period, 2023, which was 383.8 million. Total shared R&D revenues decreased by 7% to 302.4 million. while revenues of just biologics increased by 50% to 88.5 million. Adjusted ABDA for the first six months was minus 0.5 compared to 33.9 million in the first half last year. Leticia will share more details later on. I'd like to guide you through the key underlying trends that have led to Evotech falling short of revenue and profit expectations. Most notably, the market environment has given us no new signals of recovery to happen still within 2024, as we hope for. We expect a broader recovery now earliest in 2025. We continue to face stagnation of early R&D spending in biotech, while geopolitical factors and slow economic growth is leading to more cautious decision-making in the pharmaceutical industry. The sales order book in our discovery business, a core pillar of Shared R&D, continues to grow at a very healthy level. Q2 2024 was in fact one of the best quarters in terms of closed sales. Our 2024 revenues, however, do not follow the same upward trend, mainly for two reasons. Firstly, within Shared R&D, the portion of integrated multi-year contracts has increased. The multi-year contracts are generally positive. They provide us with a stronger order book for the years to come. However, we lack fast-turning orders, especially in our transactional businesses, notably development and cybertechs, but also fast-turning work in discovery. Secondly, especially with biotech, we experience a long time span between closing the deal and scaling up the work more broadly. Consequently, the conversion of orders to bills, our revenue phasing, and mix have changed. Currently, we are now working on adjusting our workforce capacity to the new market environment while also maximizing commercial efforts to drive short-term revenues. As a result, the mismatch of our revenue profile with capacities has severely impacted our short-term profitability. Moreover, EvoTech has a too high fixed cost based in relation to the current revenue profile. We identified areas where we can adjust capacity and approve, and this holds true for our operations, but also for other areas like IT. While costs for the recovery activities after our cybertech are gradually in decline, we are making sizable investments into our tech stack to be more agile in future. As mentioned before, our JustAvotech business has grown strongly in the first half of 2024. That said, costs related to the ramp up of our new J-Port facility in Toulouse will be higher than initially planned, while we also make important learnings as we ramp up this new and highly competitive and compelling technology platform. We've taken decisions to bring people on board in an expedited process in order to deliver on our commitments with our customers. Furthermore, in the first half of 2024, we faced non-planned one-off costs. In the light of the continued challenging market environment and the fixed cost situation, we updated our guidance last week. Further explanations later during this presentation. Earlier this year, the Management Board took immediate action to start course-correcting the development. We announced a reset of priorities earlier this year towards profitable growth, and this program is gaining further momentum. We aim to deliver 40 million of gross savings fully effective in 2025. I'm now handing over to Letizia for the financials.

Thank you, Christian, and welcome from my side. Let me now guide you through our H1 financial results in more detail. In H1-24, we achieved €390.8 million revenue, which represents a slight 2% increase compared to the same period in 2023. The revenue increase is driven by the continued growth of just Evotech Biologics, offsetting the lower revenue in Shared R&D. Justibotec Biologics reached a half-year revenue of $88.5 million compared to $59 million in the previous year. This growth of 50% was strongly driven by the higher order book in the US and helped by the first client projects in Toulouse. The new manufacturing plant in Toulouse, France is expected to be fully operational in Q1 2025. Our shared R&D business declined by 7% from $324.8 million in H1-23 to $302.4 million in 2024 due really to the persisting challenges in the market environment. We remain committed to investing in the future with the R&D expenses of $29.3 million in H1. However, we reduced spending from 30.9 million in H1 last year to 29.3 million H1 this year, representing a 5% decrease as we focus on platforms that are best aligned with the strategic fit and relevance for our partners. Adjusted group EBDA for H1-24 is close to breakeven at minus 0.5 million, driven by a persisting mismatch of revenues and costs in the shared R&D segments, as well as higher costs related to the ramp-up of the new jet pod in Toulouse, France, within the just Evotech biologic segments. To sum up, we face a challenging H1, driven by our high fixed cost base in combination with the slow market demand for our shared R&D segments. which we are addressing through our priority reset over the next quarters. An additional contribution to the low H1 EBDA comes from our unprofitable business in Halle, focusing on small-scale commercial manufacturing and off-gen therapy, with a total H1 loss of €4.1 million. Businesses are no longer considered part of our core business and we have launched initiatives to separate from our business in Haller and wind down our operation in Orff. Without these business areas, our co-operations generated an adjusted EBDA of 3.6 million in H124. As we separate the business in Haller and Orff, we will see an uplift of our reported group EBDA. This effect should become visible towards the end of this year and in 2025. If we look now at the quarterly development of our financials from Q1 to Q2 2024, we see another challenging quarter as anticipated. Revenue in Q2 are lower than previous quarter in both share R&D and just Evotech biologics. However, driven by different reasons. While the shared R&D segment faced another quarter with a challenging market environment, just Evotech Biologics is comparing revenue to a particularly strong base in Q1 last year. And this is due to completion of selected work packages. Overall, the seasonality of revenues in the ramp-up phase as an element of volatility through revenues are strongly increasing over time, as Christian will detail in the operational update. On the other end, the gross margin in shared R&D has improved from 12.8% to 15.4%, despite the lower revenue, owed to immediate actions on mostly non-recurring cost optimization to transition into the recurring savings phase of our reset program starting as of July. Just Evotech Biologics has seen a turn from a gross margin of 27.9% in Q1 to minus 19.3% in Q2 due to lower revenue and higher costs from the ongoing capacity ramp up, especially in Toulouse. While we are reducing quarterly volatility as we grow further, and despite this result for H124, our goal is still breakeven over the full year. The R&D expenditure has reduced from 16.1 million in Q1 to 13 million in Q2 as a result of our focus on selected R&D platforms that are best aligned with the strategic focus of our partners. To sum up, while we experience another challenging quarter with lower revenues, we see select positive effects. On the other end, Just Evotech Biologics faced a higher cost base due to capacity ramp-up to support the strong order book. We are managing our balance sheet cautiously to offer flexibility in our strategic execution. While total assets decreased to 1,998,900,000 versus 2,252,500,000 end of 23, mainly due to a decline in cash and cash equivalents, Our equity ratio remains stable at around 50%. Our cash flows were impacted in H1 by the repayment of loans of 110 million, but challenging performance and temporary unfavorable change in working capital. This cash flow combined with our reduced ATN EBDA has resulted in an increase in our net debt leverage ratio to 4.3. While our net debt leverage has increased over the past period, we expect to meet the financial governance in the period going forward based on the improving operational profitability and cash outflows, together with additional plan optimization measures. We will provide further detail in our next call. In addition, we have strengthened the resilience of our balance sheet through subsequent events post H1. In July, we successfully completed a revolving credit facility of $250 million, which replaced the majority of our old debt structure. Cumulative proceeds from BMS Neuro and Oncology in July and August exceeding $100 million are one contribution to supporting the improvement of our operating cash flow. I will now hand back to Christian, who will guide you through our operational update.

Thank you, Leticia. I will start with recent developments in shared R&D and then speak about just Evotech Biologics. As started earlier, our discovery business outside of the S-partnerships had an exceptional quarter in the second quarter this year when it comes to closed sales. As a reminder, Discovery is where our core offerings in Shared R&D sit, and it reflects roughly 70% to 80% of Shared R&D. This is a great achievement and speaks to the differentiated value proposition EvoTech has in an overall weaker market environment. As explained, we see an increasing share of multi-year deals and slower ramp up from project launch to broad use of EvoTech capabilities. and consequently the utilization of our workforce. Hence, sales translate into revenues over the remainder of 2024, but also into 2025 and beyond. In short, our mix is changing further towards strategic integrated deals, factually spreading out sales over a longer period of time in terms of revenues. Hence, we see both a positive momentum while continuing to face the challenge of competition and slowdown of growth in the more fast-turning and transactional parts of our business. Notably, let us call out development. While our integrated offerings are differentiating, especially our highly sought-after Indigo solution, we see a challenge to deliver short-term revenues. We started the turnaround program and see increasing proposal momentum, but it is too early to declare success and it will likely need tailwinds for market recovery in 2025 to move back to revenue growth in development for this part of the business. Evotech continues to be a highly attractive partner for pharma and biotech companies as well as foundations such as CHDI and Crohn's and Colitis Foundation. This is based on our fully integrated capabilities but in particularly also on different drug discovery and development platforms which come hand in hand with a highly skilled and experienced workforce. As you can see on this page, we have signed various new partnerships with foundations, biotechs, but also pharma companies in the first half of this year. Regarding foundations, we are extremely proud that we've been able to extend our collaboration with CHDI and Huntington disease, which is not only very significant in scope, but it's our longest standing collaboration, closing in on 20 years of continuous collaboration by 2026. We're also very proud to partner with the Crohn's and Colitis Foundation, which is yet another endorsement of Evotech's capabilities. We're creating additional partnerships with Pfizer and Bayer in the field of metabolic and infectious disease, as well as cardiovascular disease, respectively. The fact that pharma companies tend to build multiple partnerships with Evotech indicates that we deliver high-quality work in line with expectations of our partners. An excellent example An excellent example are our BMS collaborations, which continue to deliver, and I will talk about this in a bit more detail in the following two slides. On page 17, you can see the full history of our BMS neuro collaboration, which is based on our IPSC platform. It started back in December 2016, when we signed the partnership on the basis of a $45 million upfront payment. The collaboration was continuously expanded during the first six years, as evidenced by many success-based payments. Last year, we signed an extension and expansion agreement of the partnership, including an upfront payment and licensing payment totaling $90 million. 2024 has proven to be a very successful and highly productive year again, with the announcement of three key scientific achievements, resulting in payments of $70 million in total. The collaboration already delivered the first drug candidate into the clinic, and although we can't discuss details of scientific achievements, they're clearly related to expanding and advancing drug discovery programs. The following slide gives you a perspective of our BMS oncology partnership. This partnership was originally established back in 2018 as a key alliance in the field of targeted protein degradation with a focus on oncology. The initial agreement came with an upfront payment of $65 million and made a lot of progress right from the start with undisclosed development extension payments. The productivity of this collaboration can best be judged by the fact that we were able to extend and expand the collaboration in 2022, triggering a $200 million upfront payment and up to $5 billion in potential success-based payments. Since then, we've made significant progress in continuously expanding the pipeline, which is exemplified by $75 million in success-based payments in 2023, and has recently announced another $75 million in payments in 2024 up to now. As previously announced, we are reporting just Evotech Biologics as a separate segment to better reflect the significant progress this business has made and its growing contribution to Evotech's overall profile. I recently had the opportunity to visit the JustEvoTech facilities in Seattle, Redmond, and Toulouse, and I was really impressed by what our colleagues have built over the past few years. The innovations coming out of JustEvoTech, from our industry-leading cell lines to our novel continuous manufacturing technology, hold the potential of a paradigm shift in biologics development and manufacturing. These advancements position us in a growing modality, and I'm confident they will play a key role in shaping the future of the industry. Our value proposition at Just Evotech Biologics range from technology partnerships and molecular optimization to commercial manufacturing. We're witnessing progress at every step. Technology partnerships have emerged as a new layer. We are honored having been selected by the U.S. Department of Defense for its manufacturing optimization program. This is a significant achievement as we will be further developing our state-of-the-art ultra-rapid and cost-efficient biotherapeutics manufacturing platform, which includes the seamless integration of accelerated monoclonal biologics drug development. This partnership underscores our commitment to enhancing the US government's ability to respond swiftly to emergencies involving biologics. At the molecular optimization level, we've also secured various partnerships, amongst others with the German Cancer Research Center and the University of Oxford. In the IND enabling phase, we've established a new partnership with a leading innovative pharmaceutical company, alongside additional collaborations, and we're now seeing substantial resupplies due to our successful work over the past few years. Moreover, our late stage programs are making remarkable progress, positioning JustAerotech Biologics technology for entry into the commercial space. Let me also provide you with an update on our Sandoz biosimilar partnership. Since closing this partnership in 2023, we've seen good scientific and strategic progress. We remain fully committed to our shared goal of making biosimilars more affordable. A few weeks ago, JustAvotech Biologics expanded its partnership with Sandoz. This expanded collaboration not only adds more biosimilars to Sandoz development pipeline, but also strengthens our commitment to long-term supply security for Sandoz. Our newly built J-port manufacturing facility in Toulouse will play a key role in this partnership, reserving significant commercial manufacturing capacity to ensure a reliable supply for Sandoz patients. As I highlighted at the beginning of this section, Just Abletech Biologics is well-positioned to benefit from the growing biologic field. We are recognized as a leader not only in antibody development, but also in the advancement of bi- and multi-specific molecules and other innovative molecule types. Our strategic advantage is further strengthened by our facilities in both the US and Europe, including our new site in Toulouse, coupled with our focus on commercial excellence.

Ladies and gentlemen, please hold the line. The conference will resume shortly. Thank you.

...the US and Europe, including our new site in Toulouse, coupled with our focus on commercial excellence. This positioning has resulted in a substantial growth and our sales order book now significantly exceeding 1 billion euros, including commercial supply commitments. Based on our growing order book, our quarterly and last 12 month revenues are steadily increasing. The quarterly fluctuations are mainly due to batch production volumes. We're on track to close this year with record revenue. It's important to note that while we are experiencing substantial growth, the majority of our revenue still comes from process development, though clinical, it's becoming increasingly significant and we have a clear pathway into commercial manufacturing. Let me now summarize the development of our two business segments as outlined before. For Shared R&D, Q2 is overshadowed by the mismatch of revenues and capacities. This is particularly true for our more transactional and fast-turning offering. Strategically, we've progressed on focusing shared R&D and started identifying non-core activities, gene therapy and auth being a notable example. At the same time, we were able to close further multi-year strategic collaborations. This speaks to the ability of Evotech to provide highly differentiated offerings in a difficult marketplace. The JustEvotech Biologics portfolio is expanding, and we have signed a very important extension of our partnership with Sandoz, building on momentum and initial successes. It continues to add biosimilars to the pipeline, and even more importantly, drives commitment of Sandoz to leveraging J-PoT technology for the commercial manufacturing way into 2030s overall we're making progress on resetting the business but combining the effect of delayed market recovery in 2024 our capacity adjustments being fully implemented only in early 2025 and learnings as we ramp up just it will take biologics it all led us to revised guidance for 2024. let me summarize the key drivers for that In shared R&D, and as said before, we see a positive trend in the order book for discovery. However, a share of our planned revenues is moving beyond 2024. This, combined with a persistent weakness and fast-turning business across our offering, accounts for 50 to 55 million of reduced ABDA impact in the current year compared to previous guidance. Just Evotech Biologics accounts for about 15 million of the just guidance related to higher fixed costs as explained early in this call. We're expanding capacity rapidly in light of the expanded closed sales and we build up leverage as we go. And a smaller part is related to assets we've identified as non-core business which we will separate towards end of the year as presented in the financial section. Given these major changes to our business, we have revised our guidance for 2024 last week. We expect group revenues for the full year 2024 to land between 790 and 820 million euros. For R&D activities, we're focusing on scalable first-in-class platforms and projects, safeguarding sustainable growth through a reduced R&D expenditure of 50 to 60 million euros, for the full year. In total, our adjusted EBITDA is now expected to reach 15 to 35 million euros for the full year. We announced a reset of priorities earlier this year. We are progressing well on the execution of three pillars towards sustainable, profitable growth. Portfolio adjustments, capacity improvement, and external spend, as well as footprint optimization. Let me share further details. On the portfolio adjustment, we're progressing well on the closure of our gene therapy business in order. Furthermore, we scaled back our API development capacity. In R&D, our focus on first-in-class platforms shows the first visible reduction of costs. In addition, we're focusing our business development activities to maximize our sales order book for future growth. On our capacity and external spend optimization, we're making good progress as well. We've recently concluded the reduction in force in the US and UK, totaling around 100 roles. In Germany, Italy, and France, the social processes are ongoing. In total, we are targeting a reduction of around 400 roles. Our global purchasing optimization program is progressing and we have started renegotiating with suppliers. Finally, on footprint, we're progressing according to plan. We've completed the exit of our chemical activities in Marseille in France and are progressing the ongoing closure processes in Ord as well as our activities in Halle. We've completed as well selected facility closures and relocation in Hamburg and in Abington. This is reducing our fixed cost at the respective sites and we can leverage our existing capacity more efficiently. Based on the already implemented initiatives and our implementation plan, we expect 10 million of EBDA uplift in the second half this year. This impact will come largely from our external spend optimization and reduction in force, as well as smaller savings from the off closure. The full year impact is expected to exceed 40 million euros and will be reached in 2025. The headcount review has identified a reduction potential of 400 rolls across our global footprint with a sizeable share being completed in 2024. To achieve the annual savings, we expect one-off expenses of 68 million euro, largely driven by the cost associated with a reduction in force of the 400 volts and our footprint optimization. Now, let me transition to our first thought on the more longer-term development. Evotech has been on a remarkable growth journey since 10 years. We've grown the company from 90 million to around 800 million revenues. 2024 has been a particularly challenging year, both in terms of growth and profitability. We're now focusing on preparing ourselves for the next stage in the company's growth journey. In order to make Evotech stronger for the next chapter, we will conduct a strategic review and accelerate our transformation towards sustainable, profitable growth. So thinking about beyond 2024, how should we think about building blocks contributing to profitable growth? Firstly, you have seen our new guidance for 2024. If we for a moment take this as a starting point for our thinking, we should then see the full year effect of the priority we set. That is an additional 30 million gross savings on top of 2024. The components being capacity adjustments, procurement savings, portfolio cleanup, footprint improvement. As part of our transformation program, we will look into measures to enhance productivity, better leveraging on scale, reducing complexity, and reducing process cost. Finally, we should see EvoTech leveraging revenue growth once the market picks up again. And please allow me to say that our differentiated offering should yield at least average growth actually faster than goals as we have performed in the past. We're now doing a company-wide strategic review. As part of that, I expect a further sharpened perspective on our portfolio of businesses, our footprint, and our positioning. listed upcoming important dates here on this page and we are very much looking forward to meeting you there and speak about Avotech. As you also noted, we made the decision to take out the Capital Market Day in October, which was planned along the site opening of a new J-Pod in Toulouse. Given the latest developments and the new flow, we think it's appropriate to repurpose this event. We're therefore offering an extended capital market briefing on November 6th, along with our next quarterly results presentation. Further details to follow. Let me close the presentation with thanking all of our employees who have done a fabulous job during admittedly not easy times, and our partners for the high level of trust, collaboration, and loyalty. I have deep conviction in our ability to successfully reposition Evotech to grow the company and deliver superior value for all our stakeholders. Thank you. Now back to Judith for the Q&A session.

Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one under touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove your SAP from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question is from Jack Reynolds, RBC. Please go ahead.

Thank you for taking the questions covering for Charles Weston today. I have two, please. The first was on shared R&D. So was this weakness because existing customers and contracts have kind of delayed the work that's kind of currently ongoing, or are there kind of fewer new projects starting? And I guess just kind of thinking about the wind, kind of with the recent wind, how does this translate into revenue over the next 12 to 18 months? And the second question was just on the cost savings. You mentioned that you start to see benefits in H2 and then see a benefit of 40 million in 2025. Does that mean the benefits kind of ramp through H2 and are fully realized by 2025, or do they continue to ramp through 2025, implying there could be additional benefit in 2026 and beyond? Thank you. Thank you, Charles.

And I hand over the first question to Matthias, and I think the second one to Letizia, and this is a very easy

answer thanks for the question and this is Matthias here good afternoon everybody that is really a question at the heart of what we try to present today because we see positive feedback on the value proposition from our customers which are often integrated longer term projects time period just to give you an illustration could be easily three years two to three years for longer term periods These projects, when we have talked about the delay, are converting from sales to revenue. But we have seen more recently a little bit the trend that it takes a bit of time from project start to actually more broadly leveraging the EvoTech capacity and capability. To bring that a little bit to life, you might start with some target validation work, some biology work. before we then ramp up more fully medicine, design, chemistry work, et cetera. So that's really this peer that sales translate into revenues over a longer period of time as Christian has presented before. So now you had a sub element in there are less projects starting. I think on balance, I have to say yes, just by the number of projects, because we have been clearly saying that we are lacking volume on the more fast turning, very transactional work that are by nature also smaller, smaller in value. So this is, of course, in a higher number of projects. And that's something which correlates well with market momentum. And as we have presented again, I mean, we see not the signal for market recovery. So that's part of the question I have to answer. Yes, the number of these transactional work projects, they are slower. And then your last bit of the question, a recent win, how do they translate? You have seen the exhibit that we had our best quarter in discovery. Now, you could roughly say that 70% of that sales volume are multi-year, longer-term projects. And those are very small, as I just tried to explain. So they really translate into revenues well into next year and even beyond 2025. Hopefully that gives you a little bit calibration. I'm going to hand over to Leticia.

Thank you, Mattias. To answer to your question regarding the cost savings we aim for with our project reset, here we can confirm that as of July this year, we will start having in the P&L effects and savings already in 2024, meaning that we aim to close and get that fully on the full year basis in our result of 2025 representing 40 million. So this year around 10 million, we will already have activated and it will be realized savings full year impact next year and onwards. So it's recurrent savings. So it's 25, and we can count on it for the year after.

Thank you. All right. Thanks, Charles. And back to Judith.

The next question is from Ben Jackson of Jefferies. Please go ahead.

Hi. Thank you for the question. Ben Jackson, Jefferies. Firstly, just with the 2024 guide, are you able to give us a little bit of colour about the relative contribution from each of the business segments? Is that something that you have clarity on and confide to us? And then secondly, just more high level, are you able to offer a little bit of insight in what you're seeing from the large farmer spending front? Has there been any particular softness in that, perhaps for preference for later stage trials? and any kind of industry-level trends that you're thinking that are worth highlighting. And then also off the back of that, if you're seeing a particular shift in what the large-cap farmer and perhaps the mid-biotech as well are pursuing, perhaps as a result from pressures of IRA. Thank you.

Thanks, Ben. And again, on the market side, Matthias will respond, and on the financials, Leticia will take the questions.

Okay, so on the financials, I start regarding the guidance and the main driver. So I said previously in the presentation, we have three main buckets there. We shared R&D, we have obviously the delayed market recovery, and as we said, the slower sales to revenue conversion. which shifts our growing order book into 2025 and reducing our full year EBDA expectations by 50 to 55 million versus the previous guidance. For Trust Biologics, we are learning as ramp-up operations. Additionally, we are front-loading costs to meet significantly expanded sales orders in future years and leading to higher COGS in 2024. It represents about 15 million expected negative EBDA impact versus the previous guidance. And we also highlight the unprofitable business in ALOE and ORC that we have identified as non-core asset, which has contributed by 5 million EBDA downside. So I would say the combination of the three elements brings the revised guidance as confirmed and communicated last week. And I would say, yes, at this point, our capacity is highly sensitive to the level of revenues. When I come, I explain the share, the R&D is directly driven by the top line. We know that it's highly sensitive to the level of revenues we have due to our fixed-cost base business and this is the result of capacity expansion in previous years that we have been starting to address as per our presentation already done earlier. We have now two really shared R&D, top-line, driven, directly, largely contributing to the drop in EBDA, cost and ramp-up and learning on just biologics, and I would say the two non-core business that has generated around about 5 million versus produce guidance drop. Moving then Matthias, to your part.

Let me cover a little bit your question on the market and Big Pharma. So in our last presentation in May, I explained a little more in detail how we see the market from a CEO or CMO perspective as a buyer's market. I think we are still in it. And I think one key message from us today is we don't see the markers for recovery just to happen this year. So that's what we anticipated earlier. Now, with that macro statement, let's dive a little bit into pharma, I mean, to your point. I mean, pharma, US is, of course, a core market, and pressure on pharma is perhaps the one partisan issue that we see, I mean, wherever the election goes. So there's, of course, economic pressure on pharma. How does it translate into R&D? So it's very evident from big pharma, from discussions with our customers, from you see it on the biotech, on the receiving end, There's a clear prioritization of R&D spend in the clinical phase, focus on clinical assets, also narrowing and focusing on key indication and therapeutic areas, which puts research spending under pressure, which is, of course, part of our business. biosecure somewhat somewhat i say that carefully compensating for us so we see some interest from big pharma to look into more transactional activities but it's too early i think the timeline will carry well into next year because it's i would say exploration mode because the big farmers have multi-year projects with with asian partners and you ask also on the ira I think it's one factor contributing to economic pressure, because most farmers, from our experience, do see the relevance of small molecules, given it's from a scientific side an important modality, but of course there's additional pressure. Hopefully that gives you a little bit of color. And back to Judith.

All right. Thank you, Ben. And Judith, any further questions, please?

The next question is from Michael Ricekin, Bank of America. Please go ahead.

Hey, thanks for taking the question. I want to follow up on just sort of a broad question on the market challenges you're seeing. You know, you just talked through a lot of what's going on with biotech, with major pharma. I think it's safe to acknowledge that visibility remains limited for everybody in the industry in terms of these market challenges and how long they'll last. You talk about some of this persisting into 2025. What if it persists longer? We're talking about biotech funding. We're talking about IRA. Some of these could drag significantly further. So how do you feel about the setup there? And I guess tied to that, talking about the long-term algorithm, the long-term growth construct, any comments you'd make there in light of the recent changes?

Thank you, Michael. And probably a bit early to comment on the market for 2025, but Matthias, please.

This is, of course, a very important question, and we don't want to sound like, oh, let's hope for the future. I think what we are saying today is, I think by now we understand the market well in the here and now, where the pressures are. That's, I think, one step of the base where we are today. The second step is, which is important to realize, we are able to sign strategic deals in the current market environment, which means we have positive feedback or there's an unmet need for our value proposition. And that's why it's too early to talk about future strategy, future plan. I mean, that's an anchor point for future growth and future profitability. Now, in consequence, at least for the more of what we call fast-turning transactional work, there's one scenario which is what we anticipate market recover in 2025. If not, and there's a delayed persistence of the weaknesses, of course, I think, and there I go back to Christian, he has talked about portfolio capacity adjustments, et cetera, that then have to, I mean, we have to take into account such measures like our competitors are doing.

Okay. And tied to that, you know, you identified some costs in terms of both but also some capabilities, the gene therapy business, the large-scale API manufacturing. Is that ongoing? Is there a possibility for further cost reduction and further refocus of some of the capabilities of the organization? Or would you say that component of the plan is done? You've identified everything there is to cut?

Yeah, thank you, Michael. And what I was trying to allude to is obviously we're in a phase right now where we're doing a strategic review and we're also in a transformation. And I would not suggest that our journey here is completed. think about it in components, and I was trying to lay that out a little bit on the last slide. The reset that we started earlier this year has led to sizable impact for the initiatives that we've taken. But then also, when you consider that we've been growing the last 10 years at a very high pace, obviously there is room to optimize. We will do a strategic review, as I said, but we also Definitely we'll look into productivity levers. Part of what we've done right now is also to adjust the capacity to the new market environment. I think there's clearly room to upgrade the Evotech model when it comes to processes, systems, and so forth. And that's part of our transformation program. So the clear answer is yes.

Thank you.

The next question is from Steven Ma, TD Cowen. Please go ahead.

Oh, great. Thanks for the questions. I have three questions on just biologics. So first, the acceleration of the capacity ramp up in Toulouse, can you provide more details on how much you're going to be building out Toulouse. Are you going to be maximizing the Toulouse capacity or just building out to the existing sales book? And then second, is there any plans to build out capacity at the Redmond site? And then third, can you give us a sense for how much reserve capacity you're committing to Sandoz on a percentage basis of your expected capacity in the future? I ask because, you know, due to biosecure issues, there may be a shortage of precision biologic manufacturing as US companies transition away. I'm just trying to get a sense for how you're thinking about the cost of investment today in JustEvoTech biologics versus profitability impact versus potential future opportunities. Thank you.

Thank you, Stephen. And again, Matthias on Just, please.

Steve, good to hear you. Thanks for the questions. I think what we communicated accelerated ramp up I mean, the profitability impact on just Avotech Biologics, while sticking to our commitment of breakeven, we make some learnings as we go. I think that's the fact. I mean, we learn because as you, I think very well know, Steve, it's a new technology capabilities that we ramp up. But no, I mean, we are not in one step maximizing Toulouse. We are basically accelerating the existing plan of capacity for Toulouse. We are not planning to expand Redmond yet, and we are also not talking about the next J-Pod. So it's basically the capacity we have talked about, putting that quickly in place that we are ready to roll in the next year. And that's why also the opening of J-Pod Toulouse is on track. Your second question is very important, but I cannot give you percentages or exact numbers on Thunder. We have a significant commitment. And what I can say is that Toulouse will play a significant role. I will also say we remain open for other partners, just to be clear. I know this is not a BD call, but we remain open. But it's a significant part. Your precision medicine, I mean, that's also what keeps us awake at Nike. And we fear with Redmond and also the phase one supply out of Seattle, I think we have an attractive offering exactly for that opportunity. So I think that's what we are also banking on for the future.

Maybe just to add that, obviously, we have different components here and the commercial manufacturing comes later and absorbs more capacity. But in earlier stages, there's more development work. So naturally, the mix here is changing over time.

We hope that's okay. Otherwise, we can... Thank you.

Judith, I hear we have, I think, three more to go.

Yes. The next question is from Falco Friedrichs, Deutsche Bank. Please go ahead.

Good afternoon, Falco. Good afternoon. Thank you for taking my questions. Christian, the first two questions are for you. Obviously, a strategic review is something that's an ongoing process. You always try to optimize your company. But how much more time are you giving yourself with this very initial strategic review since you've just joined the company? And then my second question is, thinking about this capital market briefing on November 6th, do you feel like you'll be in a position to provide a new medium-term outlook? to the capital market. And then my third question is going back to the market and environment and what we're hearing out of the US is that there's firstly increasing competition in the CRO space and then also more competitive pricing which could obviously be a bit more of a structural problem going forward. How do you view the situation there and do you stand by your statement that you're not losing market share? Thank you.

Thank you, Falkor. And maybe to start with a strategic review, I firmly believe every company deserves a proper thorough strategic review every couple of years anyway. We've done our last one quite a while ago, so in any way, even if I would not have come, that's a natural term that is now due. That said, I would try to answer it a little bit from a different angle. we will while we do this thoroughly we will not wait for decisions that actually will help us improve the performance of the company so I mentioned strategic review and I also mentioned accelerated transformation programs And you've seen the company acting swiftly on the reset, which will deliver the 10 million this year and another 30 on top next year. You should think about this a bit dual track here, while we continue to look into opportunities to improve our performance, to drive productivity, hence the transformation program. We will also look into the strategic aspects of our business. And obviously this can ultimately mean that we will go back and further optimize our footprint or that we will decide that there is other levers to improve the company from a portfolio perspective. So the strategic review should not signal to you that we're basically now sitting for a couple of months doing nothing. On the capital market briefing in November, obviously, we would like to give you a further update on our process of thinking. And we will let you know in due course whether this would include further insights into next year. But at this point in time, I don't feel ready to speak about it. On the last one, US competitive situation, Matthias?

Yeah, sure. Hey, Fikor, thanks for the question. I think I would love to give a little bit nuanced answer. First of all, we have to, in the here and now, we have high competition. I think you might remember a couple of months ago when I introduced how we think about this market and called it a bias market. So let's not sugarcoat it. Competition is high at this moment of time. So that is, however, a nuanced statement because not all elements in this market are actually price sensitive. So it's a big difference if we talk about, let's say, synthetic chemistry and FTE outsourcing, or we talk about a tailor-made high-end biological asset. So as such, a competition is high that we are facing. And I think we are definitely I would say winning, I'm not able to say if we are gaining share in the more long-term integrated programs for the more transactional work. We have definitely the weakness we have been talking about. So that is a nuanced picture here. We are not afraid of giving our productivity to compete. We have stable win rates. So we monitor that quite carefully across all aspects of our business and our CRM pipeline. again win rates are stable so we feel we are not losing share because of those factories but to acknowledge competition is high thank you i hope that helped a bit with your questions then back to you did the next question is from stefan wolf uh odoo bhf please go ahead yeah thanks and good afternoon um first one would be on on cash flow so um in the previous quarters

We have seen a cash burn of roughly $80 million per quarter. So what did you expect here for the rest of 2024 and also maybe looking already into 2025? And then the second one is on the new RCF. You have mentioned pre-existing covenants for the new RCF. Maybe you can share some details with us on these covenants. Thanks.

Thank you, Steven. All questions go to Laetitia.

Hi, Steve, Laetitia. So answering first with your question regarding the cash flow, what we expect and what we are targeting is a stabilization of our free cash flow trending towards breakeven for the rest of the year. So yes, you are right, H1, we have not as good as we anticipated cash flow, but we have now measures and actions in place. And also, I would say, if we look at the liquidity level in H2 overall beyond the cash flow, we will stabilize given the already confirmed payments that we mentioned in the presentation from BMS. and most importantly, the improving operational performance in the second half of the year. We have additionally plans to improve our cash position and you will hear more about our measures in the coming analysis call. Then moving to your second question, which reminds me... Revolver. Revolver. So the refinancing, we just... did in July a refinancing with the main seven banks, around 250 million facility that we get from there. And we are currently having for those ones a covenant around 375 at year end. And that's the target we are currently looking at. And for now, with what I told you regarding the improvement of operational performance, as well as the payments that are already confirmed above 100 million from BMS that will come in 2023, and the additional plan that we have, we are having a strong plan to be in line with this covenant.

Yeah, and coming in testing will be at the end of this fiscal year or?

December 2024.

Okay, thank you.

Thanks Steven and Judith.

The next question is from Joseph Haddon, RX Securities. Please go ahead.

Good afternoon. Thanks for taking my questions. First one, on the revenue mix in shared R&D, reiterated how discovery order book is is strong but development is perhaps lagging behind in terms of performance what proportions of the overall revenue within shared R&D with those to those different elements comprised that's the first one second one you you highlighted despite the strong book in discovery in in heart in the first half certain parts of the of the business in terms of revenue performance were weaker i was just wondering what particular parts of the discovery business are weak and do you see recovery with those in in terms of the order book or are there any logical kind of savings to be made there by not offering certain services. Thank you. Any detail can probably be helpful.

Thank you, Joseph. The first one I hand over to Matthias. Do you take the second one as well?

Yeah, let me try and then you can build on it or crack. Let's see what we have to add. Joseph, thanks for the question. I think in terms of revenue mix, I think we are not further breaking down our revenues into detailed sub-elements beyond shared R&D and just EvoTech biologics. We have been starting to talk about two elements in shared R&D discovery and development, and it's roughly 70-30. 70% discovery, 30% development. Now, I think what we have already, I have to remember in the full year or in the last call, Because when we talked about the other part, I mean, where's the weakness? We talked about the transactional. Today we use the word also of fast turning elements of the business where we see the weakness. Those are also roughly 30%. But to make the complex story simple, it's not the identical 30%. Because if you think about our development business, we have actually a highly attractive integrated product. So that's part of development. And part of development is very transactional, stability testing, whatever comes to mind. So the message that we bring across here is really strong value proposition traction on the more integrated offerings, cross-functional, longitudinal, longer term, and a weakness which sits partly in development and partly also on more transactional discovery services.

Greg, any further flavor from your side?

Not only just to re-emphasize that there are a number of components in the shared R&D offering which are highly differentiated, highly attractive, and doing extraordinarily well. Our disease area expertise, our molecular patient database, and panel-driven drug discovery. These are very high-value offerings in an environment which is competitive, but are also very differentiated. And when coupled with our full integration, that leads to these multi-year strategic partnerships Mateusz referred to. That's what gives rise to our confidence in the future outlook of shared army.

Thanks, Joseph. I'm asking Judith. I think we have no further questions. It's ten past three. Just a final check.

Yes, I confirm that there are no more questions registered.

Okay, then I just for the post this hand over to Volker for any final words. Well, he's saying I'm going to close the session. Thank you very much for the attention and looking forward to seeing, meeting or talking to you very soon. Thank you.

Ladies and gentlemen, the conference is now over.