Evotec SE

Welcome to the Evotech SE full-year result 2024 analyst call. I am Yousef, the chorus call operator. I would like to remind you that all participants will be in listen-only mode and that this 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 1 on your telephone. For operator assistance, please press star and 0. This conference must not be recorded for publication or broadcasting. At this time, it's my pleasure to hand over to Volker Braun. Please go ahead.

Thank you, Josef, and a warm welcome to all of you following our webcast today. We will cover fiscal year 2024 results and will also share our 2025 guidance. Before, we will be guiding you through the results of our strategic review process and share our midterm outlook with you. Before we do that, It's my duty to point to the cautionary language, which you find on page two. And the second housekeeping item is to mention that this call is scheduled for up to two hours. It's now my pleasure to hand over to Christian Wojciechowski, who will guide you through today's call.

Good afternoon and thank you for taking the time to dial in. Before we go into content, I would like to take the opportunity to welcome Paul Hitchen, our new CFO. Paul joined on March 1st and I'm excited to see such a great CFO complementing our management board. Paul and I will guide you through the presentation today. Let me first tell you how we will run this call. We will obviously cover the full year 2024 results, and we will do this right at the beginning. We will then cover 2025. I will share our views on the current market environment, but I will also talk about the broader context in which we operate. This context will help you understand better why we are confident that Evotech will enjoy accelerated growth in 2025 and beyond. This will then lead us to our strategy review and our transformation program. We will approach this call in the same spirit I announced last time, providing clarity, a transparent approach, and reliability. Reliability also means delivering on what was promised. During our Q3 2024 results, call, I announced that we will conduct a thorough evaluation of our strategy, our operations, the organizational setup, and our processes with diligence and without bias. We have concluded this evaluation and I can reiterate what I said in November. Pairing EvoTech scientific excellence with operational excellence is the way forward to deliver superior and sustainable profitable growth. Evotech today can rely on very strong fundamentals, a world-class scientific team, cutting-edge technology and outstanding customer relationships. Those fundamentals have carried remarkable revenue growth in the past. We will continue to build on it. On our journey to delivering profitable growth, You will now hear us also talking about making the company stronger, not just bigger. We will address this later during the call. Let us now start first with full year 2024. There are encouraging developments to report on. I'm quite pleased to say that after a number of rather rough previous quarters, Evotech has come nicely around the corner with strong Q4 results. 2024 group revenues, R&D expenditures and adjusted ABDA are well within the guidance issued in summer last year. We've seen a strong year-end finish, a pattern we've seen already in previous years. This Q4, however, sticks out as it has been the second best quarter ever in revenues with strong operational leverage. In 2024, we successfully strengthened many of our partnerships, both in Shared R&D and at Just Evotech Biologics, which are paving the way for long-term growth in an overall still soft market environment. I'd like to single out a few highlights. For Just Evotech Biologics, The expansion of our tech partnership with Sondos and expansion with other customers underpinning the strong growth dynamics. At Shared R&D, our excellent collaboration with Bristol Myers Squibb has been a true success story since many years. Whilst we've seen recent decline in revenues, we just signed the extension of our multi-year collaboration in neuroscience and targeted protein degradation. A new technology partnership with Novo Nordisk to support next-generation cell therapies, a new multi-year master research collaboration agreement with Pfizer, initially focusing on early discovery research for metabolic and infectious diseases, and a new precision medicine partnership in cardiology with Bayer. Those partnerships are a strong testament to our scientific excellence and are all based on Evotech in-house technology. On a group level, I would like to highlight that we have successfully implemented the priority reset in Q1 this year. I would like to now turn to Paul to guide us through our detailed Q4 and full year results. Paul, please.

Thank you, Christian, and a warm welcome from my side. Let me guide you through our full year financial results in more detail. Our full year 2024 group revenues reached 797 million euros, a 2% increase versus 2023. Our 2024 performance reflects two counterbalancing dynamics as we navigated a challenging year. Firstly, our shared R&D revenue declined from €673 million in 2023 to €611 million in 2024 in a persisting soft market. Approximately half of the reduction stemmed from BMS as we saw lower revenues in 2024 versus a very strong 2023. This is only a temporary effect with a partner where we have seen very strong continued growth over recent years and which is expected to continue in the midterm. Looking forward, we have very strong BMS work packages and an excellent asset pipeline. In addition, we have seen a reduction in our discovery business, where we have seen a decline in the more fast-turning transactional work. On the other hand, JustEvaTech biologics continue to grow strongly, reaching 185.6 million of revenue in 2024, up from 108.4 million euros in 2023. This growth of 71% is driven by our strong order book of existing relationships and new deals. Our R&D spending has reduced by 26% versus prior year, from 68.5 million euros in 2023 to 50.9 million euros in 2024, as we direct our investments to those most relevant for our partners. Adjusted EBITDA reached 22.6 million euros with profit contribution from both shared R&D and JustEbitech Biologics. Shared R&D contributed 12.7 million euros of full year adjusted EBITDA impacted by the softer revenues and the high fixed cost base as the full impact of the priority reset program will only be effective in 2025. The JustEbitech Biologics business reached a positive full year adjusted EBITDA of 9.9 million euros as the strong revenue growth compensated for the fourth quarter ramp up of costs for the Toulouse site. As a reminder, our JPOD site in Toulouse was opened in September of 2024 and is already generating revenue from P&PD activities in 2025. As we moved to full operational readiness, we are triggering further ramp up costs in 2025 to support the committed business growth. To sum up, we faced a challenging year driven by a high fixed cost base in combination with slow market demand for our R&D segment. The positive impact of cost improvement initiatives together with a strong finish in the fourth quarter have driven an overall positive landing within our guidance range. Let's now have a closer look at the quarterly performance. We achieved a strong fourth quarter with 221.2 million euros of revenues, a 20% revenue increase versus the third quarter. Overall, 4Q 2024 revenue performance was the second strongest quarter ever, benefiting from both the seasonality in fourth quarter and completion of key customer work packages. Our strong revenue performance in the fourth quarter was translated into improved gross margin of 20.8% due to operational leverage and improved mix. When combined with the partial realization of priority reset cost saving initiatives, we overall delivered an adjusted EBITDA of 28.5 million euros. That's a 33 million euro uplift versus the prior quarter. Cash flows have continued the positive trend in fourth quarter, reaching a total operating and investing cash flow of 91.1 million euros. The operating cash flow landed at 74.2 million euros in the fourth quarter. I wanted to highlight two active measures that contributed to the increase. As part of our ongoing efforts to optimally leverage our balance sheet, we generated 50 million euros from R&D tax credit factoring and 30 million euros from income tax reimbursements. The positive investing cash flow in the fourth quarter of 16.9 million euros benefited from the sale of our minority recursion equity stake with proceeds of around 70 million euros and lower capex spending of 15 million euros reflecting the planned slowdown of the capex investment rate relating to our just evotech expansion going forward our capex spend will move towards a new base level which which however is expected to be above our fourth quarter spending rate but also well below the average for 2024 spending Our total liquidity, which includes cash and investments, increased by 94 million euros versus third quarter, leading to a year-end balance of 397 million euros. Our net debt consequently improved to 43 million euros, and together with the improved last 12-month adjusted EBITDA, we achieved a net debt leverage of 1.9 times and all financial covenants in the loan agreements were therefore complied with. Moving over to our balance sheet. Evatech currently has financial liabilities and lease obligations totalling €439 million, split across research financing, a promissory note and lease obligations. 95% of our financial liabilities carry a fixed interest rates with a well-balanced maturity profile. Due to the fixed interest rates, we're also benefiting from low financing costs secured during the low interest environment. I want to mention that currently there is no active financial covenant. We agreed existing covenant waivers for drawn lines for the period of third quarter of 24 to the third quarter of 25. In addition, the covenant of our undrawn RCF was also waived until the end of the second quarter of 2025. We are in the process of renegotiating the terms with the RCF banks based on our latest financial profile. As a last topic for 2024, I'll share details of the progress made on priority reset. We are pleased with the progress that we are making in re-engineering our cost structure. We have successfully completed the implementation of measures totaling 40 million euros of run rate savings that will be fully P&L visible in 2025, with about 10 million euros impact already included within our 2024 financials. These savings are driven by successful divestment of our API business in Haller, Further footprint reductions with site exits as well as building closures in Hamburg, Abingen and Göttingen were all completed in 2024. In addition, we completed the closure of our Cologne site in the end of February 2025. Our headcount review resulted in approximately 280 completed role reductions by the end of 2024 and the remaining role reductions were completed in the first quarter of 2025. During the implementation phase, we were able to further reduce the expected one-off expenses to 55 million euros, representing a 13 million euro improvement versus our first estimation at the end of first half 2024. To conclude, priority reset has been successfully implemented and will deliver 40 million euros of run rate savings. We will not stop there. Further cost saving measures identified during priority reset program, together with additional cost efficiency measures, will be actively pursued in 2025 and more on this during our strategy in 2025 outlook. With that, I hand back to Christian to share our thoughts on the developments in our market and the underlying assumptions of our guidance of 2025.

Thank you, Paul. We see EvoTech well positioned in a highly attractive, resilient and growing market with some temporary softness. So please allow me to allude to some fundamental features of our market before going into short-term trends. Just EvoTech Biologics is serving the 15 billion fast-growing biologics manufacturing market. Within this space, continuous manufacturing is the emerging trend. as it comes with several strong technical, operational, and financial benefits over existing processes. Continuous manufacturing, therefore, is expected to take share in a market that is already growing 10% per year. At Evotech, as a leader in continuous manufacturing, we are shaping this new segment. With Shared R&D, we enable the biopharmaceutical industry to discover and develop drugs Trends in global R&D spending are therefore primary influencing factors for our business. The total spending global R&D is about 260 billion. Historically, this has grown on average at mid single digit rates. Biotech typically a bit faster, Big Pharma a bit slower. After having witnessed a very dynamic phase of above average funding, and double-digit growth of R&D budgets, triggered by COVID, fueled by zero interest rates, the market has now seen corrections in the recent years. However, the fundamental drivers remain attractive and build the basis for resilient future growth. I'd like to highlight three drivers. Firstly, the need for new drugs. The pharmaceutical industry is navigating towards a pattern cliff with accumulated revenues of $200 billion of drugs losing exclusivity by 2030. The need to refill pipelines is evident. The issue has become even more pressing as pharma companies have undergone pipeline reviews and cost-saving programs recently to adjust internal cost structures. The industry collectively will have to refuel the pipeline, be it biotech or pharma, to generate future growth. We expect global R&D budgets to grow 3% to 4% per year over the coming period, with regaining focus on early drug discovery. Secondly, the trend toward outsourcing. Research services, be it in drug discovery or in clinical stage, provide flexibility for the industry by turning fixed costs into variable costs. We see this trend continuing with more and more activities moving from in-house to external. Biotech companies are already making extensive use of it, while outsourcing and later stage services have already grown to 40% in the last couple of years. The share for early drug discovery has potential to catch up And CRO's position in this field, like Avotac, will benefit over proportionally. We therefore expect growth for the drug discovery market to outpace R&D spending. We anticipate our underlying addressable market to grow 5% to 7% during the period 2024 to 2028. Finally, the trend toward next generation technology Return on R&D money throughout the pharma industry has stagnated over or even declined over the last years. Structural changes are required. The top 20 pharma companies collectively have terminated clinical trials worth $7.7 billion in 2024. At this stage, many years of research have passed already. At Evotech, We are committed to contribute to step change improvements in probability of success, drastically shortening the timelines and decreasing the cost of drug discovery and development. The path forward is through technology. This is our sweet spot. Evotech has a unique set of capabilities. World-class expertise in automation and industrialization is our heritage. We complement this with deep understanding of disease patterns on molecule level. We apply AI to improve discovery and tox prediction. This allows Evotech to tap into a larger addressable market beyond the classical fee-for-service CRO space. While our base offering is research services, our proprietary technology allows us to create strategic partnerships and gives leeway for additional growth and value pools. The recent announcement of the FDA to pivot away from animal testing towards AI supported prediction of toxicity gives a clear signal of the direction of travel. Let us now turn to more near-term drivers, quite a few of them of geopolitical and regulatory nature. To be clear, right away, we anticipate the direct effects from tariffs and budget cuts in the US to be limited. As a service business, our exposure to traveling goods, hence the tariffs, is limited. Our direct exposure to NIH funding and related governmental budget cuts in the US is small. On the flip side, we are ready and prepared to support our customers on potential implications of the Biosecure Act. And as mentioned before, the recent announcement of the FDA on animal testing opens new opportunities for Avotech. The macroeconomic situation, however, is creating uncertainty for our customers and is still impacting the R&D spending in Biotech. While funding seems to be improving, money is preferentially routed to late stage projects. As a result, we expect the demand from biopharma to remain soft throughout 2025 at 2024 levels. The tipping point toward growth is not yet reached. At the top end of our expectations, we expect this in the second half 2025. In sharp contrast, the biologics market for just Evotex Biologics is very robust and we remain highly confident about the short and long-term future of this business. Paul will now speak about our guidance for this year.

As we navigate an uncertain environment, we do see growth potential. And it's worth spending some time on the building blocks of our 2025 outlook. We expect that the tipping point for biopharma to happen at the earliest at the end of this year, meaning our shared R&D business will continue to experience a softer market in 2025. However, approximately one quarter of our business is exposed to the higher growth biologics market where we also benefit from existing strong strategic partnerships and new growth potential. Whilst we will provide some more update on our first quarter in 2025 on the May 6th update, we can say that we have seen a weaker start to the year in shared R&D. However, we've also seen a stronger start to the year from our JustEvaTech biologics business. As mentioned earlier, Our priority reset will lead to an additional €30 million of gross savings in 2025. Our ongoing focus on tight cost control and cost initiatives, in addition to project reset, are set to compensate for one-time non-recurring benefits seen in 2024. This continued focus on tight cost control remains a priority in 2025 and a new set of initiatives will launch in 2025 as part of our strategic plan, which will be outlined shortly. Whilst our focus is on a lower cost curve, we also continue to invest in growth. The opening of JPOD in France in September last year and an acceleration of manufacturing readiness for our partners requires pre-investments into OPEX for serving committed business beyond 2025. With this said, we would like to share our 2025 guidance with you. Group revenue is expected to grow 5% to 10%, that's 840 to 880 million euros, driven by just Evotech biologics, with shared R&D revenues at broadly similar levels to 2024 given the soft market environment with upside potential if market tipping point is reached in the second half. We see strong progress with strategic partnerships suggesting meaningful contributions from milestone payments over the next 24 months, yet more likely in 2026. Just Evotech Biologics revenue growing beyond the market growth rate as Just delivers on its strong order book and strong underlying new customer demand for the Just Evotech technology. We will continue to prioritize our R&D expenditure towards differentiated, scalable platforms and technologies. Our group adjusted EBITDA is expected to be between 30 and 50 million euros. Shared R&D will be the main contributor to group EBITDA in 2025. Project Reset is delivering in full and we will see higher productivity in our operations as we drive further cost optimization and improve our existing equipment and infrastructure utilization. Adjust Evotech's biologics business will see a higher ramp up costs for the Toulouse site versus 2024 as we pre-invest to serve future customer committed business and continued high growth beyond 2025. Our overall adjusted EBITDA guidance reflects a balance of cost discipline and investments to support the growth of our Adjust Evotech business. I wanted to spend a moment explaining the drivers of the 2024 to 2025 guidance. From our starting point of 2023 million, sorry, from our starting point of 23 million, the guidance may appear a little light at first glance. As the 30 million euros of incremental savings from priority reset would already bring us above the 50 million euro EBITDA level in 2025. However, the underlying improvement reflects consideration that full year 2024 not only benefited from approximately 10 million of recurring savings related to priority reset, it also benefited from one-time savings that will not recur in 2025. An example would be a reduction in our variable compensation that was appropriate in a year where we also saw an 8% reduction in our workforce. The negative impact of the non-recurring 2024 one-off savings will be more than compensated by two levers. Firstly, we have launched further cost measures beyond priority reset, contributing approximately two-thirds of the remaining uplift. And secondly, the moderate shared R&D volume growth will be absorbed by our remaining workforce and thus largely dropped through to earnings. The Justeva technology segment, while anticipated to outpace the market, is not expected to contribute materially to the group's adjusted EBITDA in 2025 due to the continuation of the fourth quarter 2024 cost ramp up as we prepare for future committed demand. In short, the business will drive improved operational discipline, whilst continuing to invest in our higher growth segments. And with that, back to Christian.

To sum this up, after a challenging couple of quarters in 2023 and 2024, we landed the business along our guidance from summer. Our last quarter was strong in revenues and profit, both for Shared R&D and just Evotech Biologics. while we substantially improved our net debt ratio. Our turnaround continues in 2025 with revenue and profit going up in a still challenging market environment. More importantly, we are strengthening our backbone and stabilizing the business to allow us to drive operational leverage once growth in shared R&D returns. On JUST, we are committed to driving continued growth at a very high rate, supported by sizable investments in our workforce in 2025. We are now opening a new chapter of our story toward profitable growth. So let us continue with a look into our strategy and the key elements of our transformation going forward. A quick reminder of our journey. In the first quarter last year, we communicated a priority reset for the whole company towards profitable growth. As a consequence, we've made immediate adjustments to our business to right size capacity and deliver 40 million of savings. The reset has been successfully concluded. In November, I then announced a strategy review. As promised, we've conducted this thoroughly with an unbiased view. We've gone very deep, unfolded our business, assessed each component of it, explored what customers really want from us. It's still the essence of our strength to come up with a very clear, compelling strategy for the company and the revised financial plan. So what is it about? At Evotech, We strive for technology and science leadership in everything we do. We are pioneers in drug discovery. Together with our partners, we accelerate the journey from concept to cure. We achieve this by leveraging cutting-edge technology, disruptive science, and AI-driven innovation. We're focusing on two business pillars, drug discovery and preclinical development, as well as just Evotech Biologics. This means adjustment to our business model, simplifying and focusing shared R&D, enhancing just Evotech Biologics. We will adopt our way of working. We will generate growth momentum with a new targeted commercial model. Our commitment to operational excellence will lead to a transformative step change in our performance we will prioritize and focus on developing our talent, recognizing that our people are the driving force behind our success. Alongside our transformation, we're establishing a clear structure, dedicated responsibilities, transparent decision-making, accountability, and avoiding any kind of silos. Sustainability for us is a business case, reducing lab time, and thus energy, minimizing waste, optimizing natural resources. These are all essential factors for us in running our business as responsibly as possible and supporting our partners' ambition. As said, the umbrella of our strategy is differentiation through technology and science leadership. This then steers our view for the future business portfolio. We will preferentially invest in opportunities that further strengthen our leadership profile, opportunities that make the company stronger, not just bigger. We're simplifying the shared R&D business model. Our intent is to enable our partners to accelerate drug discovery, driven by technology, not to build our own biotech pipeline. Our scope is sharply defined from target ID to R&D. The decision is based on our strength and our customer decision points. We will not be in clinical development. We recognize the different dynamics and characteristics of individual services within the scope. Some of them commoditizing, while others are true high tech, and yet others will massively benefit from next generation technology. We've unfolded all of this, and we will preferentially invest into high growth, high value, tech-driven segments where automation and industrialization are key. For Just, it will take biologics. We will upgrade our model. This business is a world leader in developing enabling technologies for end-to-end continuous manufacturing. We're excited about the value proposition of Just, Our near-term focus is on even better monetizing our leading technology and existing assets. We're spending significant time exploring options here. We're not contemplating investing into a J-Pod 3 during the current planning horizon. And allow me to say we will be very capital efficient going forward. With our new strategy, we are refocusing Evotech on its core strength to deliver maximum impact for our customers and patients worldwide. Rest assured, this strategy is already in execution. We've streamlined our asset pipeline by 30%, focusing on high quality, high potential assets. As part of our cleaning up, we've divested EVT 201 and stopped activities in other projects which did not anymore meet our high-quality, high-potential criteria. Going forward, we are focusing our R&D spend on further developing our proprietary platform technology. Investments into own, unpartnered assets are limited to scientific proof points. This is reflected in a reduction of the flight level of R&D spending in 2025. In Shared R&D, the concept of risk sharing and opportunity sharing will be limited to high value strategic partnerships. This is also a sneak preview. We might want to reflect the adjusted strategy in adjusting the name of this reporting segment in future. Our strategy is not to act as a VC player. We have therefore already reduced our equity participation exposure. with intent to exit over time. As you heard earlier, we sold our shares with recursion in a very favorable time window, leading to an overall strong IRR of this investment. Finally, as mentioned before, we are actively exploring opportunities to upgrade our model, adjust Evotech Biologics, contemplating ways to better leverage existing technologies and resources in a more capital efficient way. Technology and science leadership is our heritage and our sweet spot. The company originated in making high throughput screening accessible for industrial purposes. Technology and science leadership is also what our customers expect from us. And we have been told over and over again that this is where Evotech really excels. But it also provides us with access to growth beyond the classical CIO services. As we spoke about before, traditional ways of running R&D projects are coming to its limits. While standardized services are increasingly outsourced, additional growth will be fueled by next generation technology platforms, and EvoTech is leading this wave. For example, we have pioneered the field of omics. We're currently running one of the largest research initiatives in this field. We've deeply embedded stem cell technologies and molecular patient databases in our scientific expertise in our toolbox we're using ai and ai supported platforms to accelerate the journey for drug discovery and to improve prediction we lead in cell therapy technologies and we are reinventing biologics manufacturing with just able tech biologics all of which are playing in markets, growing at healthy double-digit rates. All of this goes well beyond classical CRO services, the CRO essentials. Our technology allows us to strike strategic deals. It puts us at the higher range of a market growth perspective, and it generates additional value pool upsides. In conclusion, we are convinced that Evotech will be trending to above market growth rates and industry leading margins. We will see sizable contribution already within the next two to three years, reflected in our mid-range plan and further accelerating thereafter. As we speak, we are adjusting our commercial model. This fresh approach better balances our established strength in long-term high-value strategic collaboration while leveraging our platform to its full extent for standalone projects. In the center of all considerations is the question of how we create best possible value for our clients and how we can create a more scalable model. Industrialization and automation are the basis to deliver excellent results no matter if we talk about a single experiment in the lab or multi-year strategic collaboration. The more standardized offering has to focus on speed and ease of doing business with us at industry-leading quality standards. Additional services are provided in our integrated projects. Here, our customers benefit from a one-stop shop approach, integration and parallel work allow for faster generation of results an important element is also getting access to expertise of our people and the benefit from consulting services the gold standards of our offering becomes part of our strategic partnerships where we create long-term collaboration in these collaborations our customers get exclusive access to our proprietary technology to therapeutic area expertise and IP in exchange of value add-on revenue components such as milestones, licenses, and royalties. Our revised strategy is centered around technology and science leadership. In support of this, our internal R&D will focus on developing our technology platforms for drug discovery. We will continue to do very selective investments in early stage, highly differentiated assets on our own behalf. Those serve as valuable proof points of the effectiveness of our technology, and they open the door for strategic collaborations. We will only advance those assets beyond early stage as part of a strategic partnership. This collaborative approach ensures limited financial risk exposure while offering attractive financial upside. Evotech today owns an impressive pipeline of assets comprising over 100 individual assets. Around 70% of those are partnered with top pharma companies. They target major therapeutic areas. Those partnerships provide research payments to further develop the assets plus significant financial upside in terms of success-based milestone payments and royalties. By collaborating with multiple partners across diverse therapeutic areas. We are mitigating the risk profile, but also significantly enhancing the likelihood of bringing drugs to market. In line with our strategic review, we streamlined our asset pipeline and we will focus on high quality, high potential assets. Today, these are around 100 assets with six in clinical and six in preclinical stage. Over the next 24 to 36 months, we aim to further elevate the quality of the pipeline by progressing and increasing the number of clinical and preclinical assets. The revenue potential for Evotech until 2045 is around 16 billion euro based on milestone payments and royalties, this obviously non-risk adjusted. Our partnerships with BMS are particularly promising with Evotech eligible to receive over 7 billion euro in milestones for its work on more than 30 assets. In the three years to come, the potential is more than 500 million, increasing to over 1.2 billion in the next five years. Allow me to say we've taken a conservative approach in risk weighting the potential for our mid-range plan. A few more words about Just Evotech Biologics. We are excited about the business. Our revenues have grown from about 40 million in 2021 to over 180 million in 2024. As we build and diversify our customer portfolio, we will see Just Evotech Biologics continuing to enjoy very healthy growth this year and beyond. We think that the potential of this asset is not yet fully exploited. And we're spending a lot of time thinking about better monetizing our technology and assets. Along our group strategy, remember technology and science leadership, we're exploring options to further expand our leadership position in the process technology and cell lines and others. This will come with expanding our commercial model. We're confident that we can enlarge our addressable market beyond the classical CDMO space. We're pivoting towards a CapEx lighter model. For the current planning period, we're not contemplating to invest into a network of JPOs. We expect to share an update on the JustEvoTech biologics strategy and those details for the Q3 call. Now let us move on to look at some financial implications. Paul, please.

Thank you, Christian. Our improvements in governance and performance transparency are already well underway. From the formation of active transformation and commercial committees to the institution of structured CAPEX approval processes. As you have seen, we have a commitment to operational excellence and we'll be committing to a grossed cost efficiency program of a further 50 million euros between 2025 and 2028. In the immediate future, optimizing our operating model and organizational structure will provide the necessary conditions to drive our transformation and pivot to operational excellence. We have identified tangible levers to address our footprint over capacity, our inefficient processes, whilst reducing complexity within our SG&A. Over the mid-term, we'll drive further operational leverage by automation and industrialization of our operations. Our strategy will realize sizable progress in the next two to three years with a refined footprint, improving gross margins, smarter SG&A, and careful R&D investments, all improving profitability while sharpening our competitive edge and driving long-term growth. We firmly believe that our scientific excellence coupled with operational excellence will translate into material value creation. The depth of our innovation and differentiated technology combined with improved focus and operational efficiency will set us on course to grow faster than the market at high single digit or low double digit percentage rates and to generate EBITDA margins over 20%.

And with that, back to Christian to wrap up. So to conclude the introduction of our new strategy, we have a clear value creation plan centered around four core pillars. Firstly, above market growth rates at better quality earnings, driven by our technology, leadership and innovation. This will be supported by our focus on higher value generating market segments with above average growth rates and strong margins that require differentiated offerings. Secondly, we're committed to driving operational excellence. As part of this, we've launched additional optimization measures that are expected to drive more than 50 million cost out by 2028 on top of existing commitments. We're furthermore expecting additional productivity gains to continued operational leverage through to 2028 as the market recovers. Just Evotech Biologics is a core pillar of our profitable growth. We will realize the growth commitments from existing and new partnerships while focusing on further improving the monetization of our existing technology and assets. In addition, we have a strong pipeline of assets with credible partners and significant associate milestones and royalties. Thank you. And now the management board and I are looking very much forward to taking your questions. Back to the operator, please start the Q&A.

Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to only use handsets while asking a question. Anyone who has a question may press star and 1 at this time. The first question comes from Christian Eman, Warburg Research. Please go ahead.

Hello, everyone, and thanks for taking my question. I have a couple, if you indulge me. So I would like to start, although I appreciate the global overview and the nice strategic update, I would like to start with a more local question set. So first of all, for the other operating income in 2024, obviously it was a very important point or part of your earning for 2024 with around $48 million. In other income from tax credits, my question here would be, what do you think is the sustainable level of income tax or tax credits or R&D tax credits for the foreseeable future? What can we put into our model and see are there any risks to these kinds of tax credits at the moment? Do you, for example, in the UK or in France? My second question would be to the savings composition for the 50 million gross. What are the net effects you foresee? Which costs do you expect to increase over the time? So what can we say, okay, this one is actually the net effect over the next years? Then in regard to the drug portfolio expectations, so you narrowed it down to 100 products. Could you give us a little bit more detail about the phase composition? So which ones are in clinical trials? Which ones are in discovery? or we can have a more granular approach to our own risk-adjusted model for this kind of value. And my last question is in regards to the FDA decision. So my question would be, how sophisticated are those models today? So is it really possible to really phase out animal testing over the foreseeable future in let's say four to five years and to really get rid of the use of animals in this regard and where are the models at the moment and what can be done with it. Thank you very much.

Thank you, Christian. And I would say the first two I'll hand over to Paul and then number three and four to Kurt Dolman. Shall we start with the financials?

Yeah, Christian. Hi, this is Paul. Nice to meet you. So first of all, on operating income on the tax credits, you are broadly correct with your assumptions around the generation or the market generation of our tax credits. At this stage, we don't see any risk to that. And I would say that they would grow in line with our business growth and where we actually perform the work and the R&D work. And that's how we plan within our models. Your second question around the composition of the 50 million euros, gross versus net, maybe just to dwell on this point a little bit. I'd say a couple of things. First of all, we're really pleased with the cost initiatives that we've achieved in 2024 and further committed in 2025. And as we build on those efforts and look forward to driving more productivity and cost efficiency over the planning period. as you see on the on the page that we presented we've got a full suite of levers and the 50 million is the cost out gross cost out beyond 2025. um when you think about the gross versus net uh question what i would say is over the planning period when you consider the combination of cost out, productivity, inflation, you broadly get to the net 50 million that you also see on this page. I hope that answers the question.

Cord, I think I'm back to you. Yeah, so let me start by trying to address the question regarding the asset pipeline. As Christian already stated, there are currently six assets in clinical stage phases, early stages, phase one, and then six preclinical stage assets. We do expect or we do have, we do see opportunities that within the next 24 months, about 15 assets have the potential to move forward from the pre-clinic into the clinic. And then we have quite a number of larger number of earlier stage assets that will then fill in the pipeline in the pre-clinic.

Then... Sorry, to ask again, the line broke a little bit up. Six assets in clinical stages and six T-assets in preclinical stages? Six.

Six in preclinical. Okay. Thanks. Yeah. But over the course of the next 24 months, we have about 15 assets that could move forward in total into clinical stages. So that gives you an idea about the breadth and depth of the pipeline in discovery at earlier stages.

So then we have got the FDA topic, animal testing, obviously. uh a lot of noise around that and it's fair to say that we've it's not a new topic for us honestly we've been looking at this since a couple of years and uh talked a lot less about that but this is pretty real let court explain what is behind that and what our activities are in this field so you're alluding to the fda announcement they announced that they intend to phase out animal testing requirements

for monoclonal antibody development, but also for other modalities. They plan to replace current standard animal models with new alternative methodologies. And here they mentioned explicitly human microphysiological systems, which are usually cell-based models in 3D or 3D human cell-based systems. Then they also mentioned computational modeling and in particular AI-based approaches to biosimulation. At Evotech, we not only support this initiative of the FDA, but we highly welcome this development. Evotech is really uniquely positioned to serve this developing market. At Evotech, we can bring to bear a fully integrated suite of new alternative methodologies reaching from molecular patient data, human microphysiological systems, to in silico-based prediction tools, but also computational modeling. At Evotech, we have established really a broad suite of human microphysiological systems, which we can combine with sophisticated imaging, but also detailed omics-based analysis, as well as AI machine learning supported data analysis. Based on our human iPSC platform, we currently run more than 25 cell types, including liver organoids, cardiac microtissues, kidney organoids, but also neurospheres. And we are operating most of these assays in 384-well formats. These are in high-throughput models, and we can combine these models with high-resolution, high-throughput omics technologies. So in order to be clear, I want to give you an example. Evotech is absolutely leading in predicting, for example, drug induced liver injury. This is the most common cause of liver failure. Although we cover essentially all standard approaches for predicting daily or drug induced liver injury, our most successful platform here is based on liver organoids in combination with omics based analysis. Whereas most competitors here with their standard platforms reach predictive accuracies of currently around 75%, Evotech's platform reaches a predictive accuracy of over 87%, and we believe we will soon surpass 90% of predictive accuracy with our platform. To our knowledge, this is unprecedented. We are currently expanding this platform into additional areas such as cardiac, neuro, kidney, et cetera. And so we really believe that Evotech will set itself apart, especially in these areas.

Thank you, Kurt. And back to the operator.

Thank you. The next question comes from Mike Ryskin, Bank of America. Please go ahead.

Great. Thanks for taking the question. I hope you guys can hear me. I've got a couple I'll squeeze them in together. So one is on your comments on expectations for the underlying market for the rest of this year. I think you kind of pointed to some continued headwinds in the first half of the year, maybe second half a little bit better. And then you talked about, I think, a 5% to 7% underlying growth to 2028. Just curious, sort of like what are the puts and takes on that? um thinking about you know obviously tariffs may not be a huge hit but thinking about nih impacts in the u.s overall you know biotech funding environment in the u.s and then potential downstream impacts of things like hhs cuts fda cuts how that could impact the r d the broader biopharma r d universe for the next couple years i think there's a lot of concerns there so i'm curious how you build up to that five to seven percent growth and then The second question I had was more on Evotech specifically, you know, the cost outs you mentioned you're taking this year. Could you just give us a little bit more color on how you're weighing those in over the course of the year? Any thoughts on timing? And then just confidence that you won't be able to cut, you know, you won't cut too deeply and you're still going to have sufficient innovation and R&D to continue to drive revenue growth. Thanks.

Thank you, Mike. I will start and hand over also to Paul. Just on the expectation of the market, obviously, one is facts, the other is sentiment, right? When you, first of all, look at how we've built up the 5% to 7% underlying long-term growth rate for the addressable market, as alluded to, we're basically starting from the funding situation or the spending situation in biopharma, and it's fair to say, you go back in history, that has always been in the range of five, six percent, four, five, six percent for the biopharma market. Then there was a sharp spike during COVID and the hangover effect more recently. Our prediction is that the spending in R&D, so big pharma spending, biotech, will come back to this three to four percent range. The 5 to 7 is then the conclusion of how outsourcing will accelerate for the COO market. So you have the underlying spending and obviously then the extra that comes with an increasing rate of outsourcing. Now, more short-term, tariffs, NIH... FTA cuts I mentioned, we've looked at that since quite a bit. We've sized it, and it's fair to say that the direct impact is fairly limited. Current tariff situation, we looked at a small number. Current exposure to revenues to NIH, frankly, it's very limited. So that direct impact we assess to be small. uh then the question is obviously is there an indirect impact uh that might happen for example because uh budgets university budgets academy academic budgets get cut there is less innovation coming from universities that is leading them in the long term to uh uh fewer carve-outs and fewer startups in the biotech industry that would be an indirect impact but at this point in time the direct impact we see is fairly manageable paul any further points on the first topic and especially on the second question around cost outfacing

Yeah, I think the first topic is covered, Mike, but just on the cost topic that you raised, which is I think specifically around the 2025 cost out, which is on top of the priority reset and excluding the 50 million that we referred to over the mid-range plan period. What I would say is, first of all, we've got very good line of sight to the cost plans that we have for 2025. It includes measures that have already been completed, such as cologne that I referred to in the first quarter. It also includes tighter cost control and lower spend managing headcounts and replacements through the organization. It will generally be directed towards cost of goods and SG&A. And as a consequence, you see on R&D innovation funding, we confirm the guidance around 40 to 50 million. So again, very, very targeted in 2025. And a lot of this cost has already been identified and much of it actually executed in the first half of 2025.

Great. Thank you so much.

right back to joseph the next question comes from charles western rbc europe please go ahead hello thanks for taking the questions um mine refer to the medium term outlook um first of all specific question on milestones uh on page 29 of the presentation uh you gave the um the chart showing how much milestone might be payable each year. It looks like for 2026, if I read it, Y-ACTS is appropriately sort of 150, 200 million even in 2026. Is that correct? And how much is in guidance for 2025 and outlook for 2028? And then moving on from that, If I look at 2028 and you've presented your CAGR from 2024 to 2028, what's the likely contribution from each division or what will this business potentially look like in 2028? And that's on the top line, but also could you give us a sense of the margin improvements across each of the two different divisions? and in particular how we might get there in terms of the growth and the margin improvements over the four-year period. Is it more likely to be back-end rated, for example? Thank you.

Thank you, Charles, and good to speak again. First of all, a short comment from my side and then handing over to Paul again. On page 29, keep in mind, this is a non-risk adjusted revenue line. So it's basically, and I've injected a small sentence. You probably also noted we've taken a conservative approach on this. Obviously, this is science. And first comment, there is a translation from non-risk adjusted into risk adjusted in our plan, which we've done carefully. But the other thing that I wanted to mention is obviously you see that it's also a bumpy road here because those milestone payments can come in a year. They can come in a quarter, but they can also slip forward or back forward. So this has given you an indication. We also have given you a little bit to calculate, obviously, on that slide. But my first and foremost comment is that the assumption for the mid-range plan is quite conservative. Paul.

Yeah, I'd like to reiterate that. So whilst we see the asset opportunity as being very significant, we are cautious when we plan for the realization of that, given the potential timing volatility on those assets and the progression of the science. And so when you think about the planning period, we have a relatively normal amount for value add ons in twenty twenty five and that increases in twenty twenty eight. But it's still a small piece of the overall revenue pie over that period. When you look at your second question around contribution of top line for each of the divisions, I would say Christian outlined on the shared R&D business, we'd be looking to grow above the market rate over the planning period and the market rate being 5% to 7%. And then the JustEva Tech biologics business would again grow significantly above the market and reflects the realization of our backlog and existing partnerships and new deals during this period of time. So an accelerated growth rate versus the overall market indication that we've given you. In terms of your elements or your question around margin improvements for the business, we don't provide guidance for the individual segments themselves, but I would say the following. When you think about margin expansion from the 2024 rate of about 3% to 20%, think about the following. Growth and mix of the business drives about two thirds of that expansion. And the cost and productivity drives about a third of that expansion. And when you think about the growth element, the just business is driving about two thirds of the overall growth. And when you think about the cost and productivity expansion, you see the cost effect in the earlier years and then the productivity and the automation in the later part of the years. But I think that hopefully gives you enough to model out a little bit the overall profile of the businesses we see at

Okay, thank you very much. Thanks, Charles. Back to Yusuf, please. As a reminder, if you wish to ask a question, please press star and one. The next question comes from Smith, Brandon, TD Cowan. Please go ahead.

I think for all the detail on the call and taking the questions. First one from us, kind of expanding on a couple of the earlier questions. I did just want to ask about some of the different growth drivers over the next 12 to 18 months, let's say, for just Evotech Biologics business specifically, and really just which among these drivers you see as more and less de-risk based on your recent conversations with partners. And I guess I'm just trying to understand a little bit better some of the levers that you can pull internally to maintain growth there, like overall, even if partners in the market potentially take a little longer to stabilize or recover. And then just maybe one other one to follow up on your comments earlier about FDA's updated guidance last week on animal testing. Just wondering if you see any potential for upside to any of your assumptions this year as companies look to shift strategy and stay aligned with FDA, or do you think that this is going to take a little bit longer, a little bit more time, and that's maybe something that you would likely see more come into play next year? Thank you.

Yeah, absolutely. And first of all, and just I would say we have pretty, pretty good line of sight on the just business the next 12 months, based on the commercial conversations that we have had in 2024. So the components are pretty much along the lines of what we've what we've said before, there is obviously pre commitment for some doors, but there's also a large group of other customers, which we've lined up in the last two years, which are contributing to this growth, not published. Maybe there's a chance over the course of the year to make the one or other more visible. So this is pretty much already visible to us and therefore comes with high confidence, as Paul was saying. And on the FCA topic, well, let me phrase it that way. We are actively using our tools already for prediction and what Cord was alluding to, the whole mix towards better and faster outcome. The question is, is there an immediate tipping point? I'd be a bit careful on this. At this point in time, we don't have sufficient information how this is going to play out with the FDA.

Maybe just one comment from my end. So ultimately, this is a development that we've been watching for quite some time. Evotech has been, to some extent, actually been pioneering sort of in bringing our mixed technologies sort of into the mainstream of the drug discovery process. And we've been, in the past, a little bit surprised about the hesitancy of using these technologies in a very concerted effort to predict efficacy and safety profiles. But we do see, even ahead of the FDA announcements, we have seen, continue to see, an increased interest in particular by pharma companies into using these kind of technologies more extensively in the preclinical setting to select compounds for further development. And so I think this will be a very important milestone for the whole industry in that regard. but it is a little hard to predict how quickly this will translate into a significantly increased business here. I would say we already see the first signs of it, but in order for this to materialize, we'll probably still take a few months more, but we are very optimistic with this.

Okay. Thank you very much.

You're welcome. And back to Yusuf, please.

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

Good afternoon. Thanks for taking my questions. I just wondered if I could dig into a little bit more about how you're streamlining your pipeline assets. You talked in the report about high value therapeutic areas. Could you be a bit more specific about the areas of focus and perhaps what you're moving away from? And then also the focus on high value services. Does that mean that the transactional work that has really kind of suffered over the last couple of years, ever since the cyber attack, really, and with a weaker environment, is any of that business being discontinued or wound down? Any detail you can give on that would be great. Thanks.

Absolutely. Maybe a quick start with streamlining the portfolio.

Yeah, so let me start by saying so that Christian mentioned that we cleaned up the pipeline and I think that's a that's a fair assessment. There were quite a few sort of historic legacy assets still in the pipeline, which have been essentially now completely removed. And the latest bit was essentially the selling of EVT 201, an asset that wasn't very well differentiated and only sort of being pursued in the Asian markets. Everything else that we currently have in the pipeline, and I mentioned the six clinical stage assets and the six preclinic stage assets and a large underlying iceberg of earlier stage assets are of the 100 assets, 70% of these are in partnership with pharma companies. And here in particular, of course, we have partnerships in the oncology space with BMS, in the neuro space with BMS, but in the metabolic disease space, kidney disease space, there's companies such as Novo, Lilly, Bayer, Novartis, J&J and others. And so we consider these really highly innovative programs with a very high potential in sort of being differentiated, turning to differentiated assets in the clinical sense. And Evotech is essentially working constantly with our partners to expand these pipelines, drive them forward together with our partners. So all of these are decisions that we are taking together with our partners. And earlier stage assets that we are driving in parts through our own R&D funding are more proof principles points that we can demonstrate to our partners that our platforms are highly productive they help us to develop highly differentiated early stage assets and very often they also serve as starting points for more strategic collaborations where these are then basically taken up as part of the pipeline building process thank you court and to

The other topic on services, as I mentioned earlier, we have a full suite of services here, but we also have to unpack this a little bit because they're not all the same. They're not all having the same characteristics and dynamics. In fact, there's actually quite different dynamics in what we call shared R&D services. So you have some, as I mentioned earlier, who we would call essentials, where the ask from the customer is pretty much a standardized service at high quality, a speed of offering and so forth. Our intent here is to make sure that on the operation side, we further standardize so that we're able to serve them at best cost um but they are also part of packages of integrated deals and strategic deals and that's typically how we also sell them in the market and when i'm uh discriminating here uh the then i'm i'm basically explaining that we are preferentially investing into segments with higher exposure to technology high exposure to uh differentiation potential So to make it even more blunt and easy to understand, if I have the opportunity to invest into the next generation of technology devices, mass specs for our mixed platform, as opposed to, for example, expanding our capacity in in API, it's quite clear what we're going to do in future. And that kind of differentiation, we're now doing on a much more granular level than we've done in the past. I hope that explains a little bit, Joseph.

Yes, it does. Thanks very much.

The next question comes from Charles Weston, RBC Europe. Please go ahead.

Welcome back, Charles.

Thanks, Christian. Thanks for taking the follow-ups. Three more, if I may, please. First of all, on just Evotech Biologics, can you help me perhaps run through again what's happening this year in terms of operating leverage here? You've got 40 to 80 million more revenue coming through, probably not much in the way of EBITDA. So what is the right base for fixed costs? What is the revenue drop through to EBITDA once fixed costs are established that we can think about for modeling purposes? Secondly, from a group basis, it was a somewhat surprise to me about the one-off savings in 2024, which I understand. Are there any further one-off savings in 2025, which we should think about in factoring in 2025 margin improvements? And lastly, a more holistic picture of the question here. What is the synergy, if any, between the divisions? And presumably, as part of your strategic review, you thought about the rationale for owning both businesses. So perhaps you could explain sort of what your thought process was there, please.

Yeah, absolutely. Thank you for the questions. I think the first two we can take quite quickly, Paul.

Yeah, thank you. So your question, first of all, regarding the JustEvaTech business. So as you rightly say, we are continuing to invest in this business over the course of 2025 to support the commercial business we have committed. When you think about that ramp-up cost, Charles, it's made up of three elements. One is the people ramp-up. costs associated with ramp up, whether that's consulting, IT systems, facilities, and so on and so forth. And the third element is around material cost spend as we ramp up to full production. So those three elements drive the year-over-year kind of cost dynamic. What I would say in terms of what does the cost base look like, the JustEvaTech business going forward and what's model, I would say that by the end of 2025, when you think about the fixed cost base for the business, you are substantially complete. So as you think about a model forward growth, you start seeing significant operating leverage within the business. In terms of your second question, which is around the one-off savings in 2024, short answer to this one is no further one-offs are planned in 2025.

And then on the last topic on just versus shared on the, well, consider the overall umbrella technology and science leadership enabling our partners to make their journey more successful. When you think about the shared R&D business, as I alluded to earlier, think about omics, think about AI that we're using, think about IPSC, think about our molecular patient database. Why are we doing it? Because we are confident and we've demonstrated that this will actually make the journey for drug discovery and development more successful. Likewise, when you think about just Evotech Biologics, think about our investments into the cell lines, the media, transfection, the vectors, increasing the expression rates of our cell lines in order to make the journey more successful at that. And you can almost say, in the end, on the left side, small molecules on the right side, large molecules, right? The synergy is technology leadership to enable partners to become more successful. Okay, thank you. You're welcome. Checking with Volker and Yusuf. I got the impression that we're through Joseph, can you Confirm? Yes.

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Volker Braun for any closing remarks.

Thank you, Josef, and thank you to all on the call for your interest in Evotech, for all your discussions. We have the opportunity to speak again very soon, in three weeks from now, on the 6th of May, for the release of the Q1 results. In the meantime, for any questions you may have, feel free to reach out anytime, and

will stand by and for the next days i wish you a happy easter and speak soon thank you ladies and gentlemen the conference is now over thank you for choosing course call and thank you for participating in a conference you may now disconnect your lines goodbye