Dear ladies and gentlemen, welcome to the conference call of Evotec SE. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulties hearing the conference, please press star key followed by zero on your telephone for operator assistance. May I now hand you over to Werner Lanthaler from Evotec, who will lead you through this conference. Please go ahead.
Welcome. Welcome to our Q1 quarterly call to Evotec. It's great to welcome you on the R&D Autobahn to Cures, where we are landing and expanding and setting the pace for drug discovery and development. We have uploaded a presentation for this call, and you will always find this presentation on our website and now on the web page to follow. If you go to page two of this presentation, you can see that I'm here together with my team, and I'm especially happy that our new CBO, Matthias Evers, has joined the team and let us warmly welcome him in this crowd as well.
I'm here together with Enno, our CFO, our COO, Craig, and our CSO, Cord, who will in this call also bring a bit more color and deeper understanding to the yesterday announced expansion of our landmark partnership in targeted protein degradation with BMS. With this, a short intro from Matthias, I think is also appropriate for all of you. With this, I hand over to Matthias.
Thank you very much, Werner. I'm very happy too. You asked me the rationale for joining Evotec, and from my point of view, it's very simple. As a scientist by heart and having now co-led R&D for pharma and biotech globally at McKinsey & Company over the last 20 years, I'm drawn to Evotec for multiple reasons. I see the strong science capabilities, a very collaborative approach to build a shared R&D economy, and a very strong can-do culture with focus on excellence. Also a bit more specifically, I've invested a lot of time and research to explore the convergence between science and technology. With the new function now bringing together business development, technology, and strategy, I think Evotec is a perfect place to deliver on this promise.
It's really an honor to be here on the team with everyone. I believe Evotec is just at the beginning, so I couldn't simply be more excited. Werner, let me give it back to you.
Thank you so much. When it comes to the beginning, let's please go to page number five of this presentation. You will see that we had a great start and a strong performance in all building blocks of the company in Q1 2022. Just a few highlights here. You see strong momentum in business build-up in all lines. We have announced a collaboration with Boehringer Ingelheim on our induced protein sensor platform. We have announced a new collaboration with Eli Lilly on our molecular patient databases in metabolic diseases. We have launched a broader initiative around molecular patient databases, which you will hear a lot from in the future. Our co-owned pipeline is progressing in multiple areas. We have received a grant from the German authorities to develop our clinical program in multiple viral diseases forward.
You have seen strong progress in our ongoing neuroscience collaboration with BMS, and you have yesterday seen that we have landed a fantastic deal in targeted protein degradation with BMS. When it comes to our equity portfolio, we have made new investments into Centauri, IMIDomics, and Tubulis, which just shows you that co-ownership for us is a strategic endeavor that will never stop as long as not all diseases are cured. We are also very happy to report back to you that our Just – Evotec Biologics business line is performing very well, and we are very happy with the transition from a construction site last year to a site where we are already producing materials as we speak, and Craig can tell you more about this later.
When you go one page forward and you look at our numbers, we are very happy that we can confirm our guidance in a very comfortable way. Our guidance shows you not only that group revenues in the first quarter went up by 24%, but also that we will grow this year up to EUR 700 million-EUR 720 million on the top line. Our guidance also shows you that we are accelerating our R&D investments to EUR 70 million-EUR 80 million this year. These are the investments that we first make to then bring back transactions like, for example, our targeted protein degradation deal with BMS. Watch out for more to come here because leveraging our R&D investments into long-term value is exactly our strategy.
When it comes to our EBITDA, we are very happy to report a profitable first quarter, which is totally in line with our expectations. We are expecting here EUR 105 million -EUR 120 million in EBITDA this year. Guidance is fully confirmed and very comfortably confirmed at this moment in time. When you go forward, Enno will now bring you into our Q1 numbers in more detail. With this, I hand over and say thank you from my side first.
Yeah. Thank you, Werner, and a warm welcome also from my side to everyone. It's a great pleasure having you on the call today for our Q1 update. Starting with a general overview. Three months 2022 numbers show an excellent 24% increase on our revenue line, as Werner just indicated already. This growth was observed in all business areas. The gross margin amounted to 19.6%, below last year's 23%. I'll come back to that on the next page. Group R&D expenses remained constant with EUR 18.1 million. Thereof, unpartnered R&D expenses increased, whereas partnered R&D expenses decreased. The R&D spend in Q1 was focused on enhancing our multiple platforms and the continued acceleration of our co-owned pipeline.
The increase of roughly EUR 10 million or 49% in SG&A expenses versus last year was mainly attributable to the recruitment of personnel to support the overall business growth and by costs for our secondary Nasdaq U.S. listing, which we closed last year. Furthermore, the capacity expansion resulted in higher depreciation of facilities, in particular related to the already before mentioned J.POD in Redmond, U.S. Rising energy prices also made an impact in Q1 2022. The other operating income and expenses increased by EUR 2 million and continued to be driven by tax credits and ID Lyon related reimbursements from Sanofi. A main reason for the increased income were tax credits in Toulouse, France, and reestablished tax credits in Italy, which could be claimed from June 2021 onwards again, and hence had no income or no comparison in Q1 2021.
With a total of EUR 18.9 million, our adjusted EBITDA lands within our expectations, but slightly below last year's EUR 21 million. Also, when looking at the phasing over the last year in the past, this is in line with our guidance. For Q1 2022, we also report a net loss of EUR 73.2 million, which was influenced by the fair value adjustments in our equity investment in Exscientia due to their recent share price development. Slide nine depicts our strong revenue growth of 24% overall, which was spread across all business areas, as I mentioned before. Recognizing some FX tailwinds at constant FX rates, year-on-year revenues would have increased by 19%. Important to note is, once again, the strong growth of our base business growing at a rate of 25%.
The gross margin decrease versus last year resulted mainly from investing in our precision medicine platforms and the continuous ramp up of our J.POD facilities in the U.S. and in France, as well as significantly higher depreciations due to the continued capacity expansions. Total gross margin, excluding Just – Evotec Biologics, would have reached 27% versus 23% during the same period of the last year. Coming to page 10. As indicated before, both segments continued to grow and perform well, reflecting the broad basis of our goal. Year-to-date EVT Execute revenues, including inter-segment revenues, grew 27% to EUR 175 million in Q1 2022. This is further driven by an increase in demand for integrated offerings and a strong demand for the base business. The adjusted EBITDA of Evotec EVT Execute improved by 14% to EUR 32 million.
On the other side, first three months of 2022 Innovate revenues amounted to EUR 36 million. Excellent, also 27% above last year due to continuous high demand for precision medicine, reflected by extended existing as well as several new partnerships, and despite lack of milestones in Q1 2022. Innovate's total R&D amounted to EUR 21.2 million, which is 17% above last year, underlining our continued investment and commitment into innovation projects and long-term sustainability. As expected, the adjusted EBITDA of Evotec Innovate remained negative with EUR 13.4 million. Slide 11 summarizes Evotec's very solid and sustainable non-P&L related financial KPIs. Here the balance sheet contraction resulted mainly from the revaluation of Exscientia in Q1.
Trade accounts receivable decreased by EUR 36 million due to EUR 40 million of milestone and prepayments cashed in during Q1, mainly related to our BMS Celgene collaborations. This improved our DSO or days sales outstanding figure for Q1 2022 to 55 days, which then again is within the corridor that we aim for, moving between 50 and 60 days. The equity ratio remained at a very solid 60%, and we can report a net cash position of EUR 490 million. These factors together indicate plenty of headroom and flexibility to further invest into organic as well as strategic growth if need be.
Total liquidity was nearly unchanged to year-end with EUR 855 million and this allows us to continue planned CapEx investment to support growth projects as well as general expansion of our capacities across all sites. Furthermore, we continue to plan to invest into our equity engagement, existing ones and new ones, as Werner mentioned also before. With that, I'm completing the financial part of the overview for today and hand back to Werner. Thank you very much.
Thank you, Enno. If you go to page thirteen of this presentation, let me introduce you to the section that Cord will then take over. Let me, at the same time, guide you to our capital markets day presentation, which you'll find online, where we typically lay out a scientific section that we then transform into a business segment or into multiple business deals, where today we will introduce you to targeted protein degradation in a deeper guidance. When you come to the underlying principle of our growth strategy when it comes to transforming science into business, the principle is very simple. Do outstanding work and you will grow with your partners. That's what we are doing, and that's the principle that we are following. It's not a coincidence when we are landing and expanding with our partners.
It is simply the function of outstanding work that is performed on our platform every day. This is a big thank you to the whole platform and all the teams that are collaborating to make this such a well-performing platform. It's not only a deal that we struck with Lilly, it's not only the deal with Boehringer, it's also what we have just done with BMS that is testament for that. With this, let me hand over to Cord to bring you deeper into targeted protein degradation.
Thank you, Werner, and good morning and good afternoon to everybody on the call. Today we would like to give you a little more background to the field of targeted protein degradation, Evotec's approach to it, and why we feel fortunate to have BMS as our partner here. Let's move to page 16 for this. The field of targeted protein degradation is one of the hottest fields in the pharmaceutical industry, and it harbors enormous potential. Small molecule therapeutics are the mainstay of the industry because they have proven to be highly effective. Furthermore, due to their oral availability, they are particularly compelling when it comes to the ease of use. However, there are limits to traditional small molecules.
In particular, the fact that many high-potential drug targets lack proper small molecule binding sites to inhibit their function means that many high-potential drug targets are essentially undruggable via traditional small molecule approaches. The discovery that small molecules can also be used to specifically trigger the degradation of disease-causing proteins very significantly expands the universe of drug targets that can be treated via small molecules. This is the main reason why this field is drawing so much attention by the pharmaceutical industry. During the last few years, many pharma companies partnered with biotech companies to access technological capabilities or know-how to support their small molecule efforts in targeted protein degradation. At Evotec, we have been collaborating with BMS in the field of targeted protein degradation since 2018.
Yesterday, we announced the extension and expansion of this collaboration into a long-term strategic partnership, and the cornerstones of this deal are summarized on page 17. The aim of this partnership is to build an industry-leading pipeline based on molecular glue degrader, which is expected to deliver multiple novel drugs into the market. The partnership between BMS and Evotec is a formidable match, with BMS being an established pioneer and leader in targeted protein degradation, whereas Evotec will contribute industry-leading platforms including, but not limited to, EVOpanOmics and EVOpanHunter, but also a suite of AI machine learning tools supporting the whole drug discovery value chain. Evotec will receive $200 million as an upfront payment and potential milestones in total of over $5 billion. In addition, Evotec is eligible to receive significant tiered royalties on each and every product developed through this partnership.
Page 18 is putting this collaboration in context of other deals signed in the industry. Many pharma companies are not only interested in the field, but also sign sizable partnerships with biotech companies. One of the largest transactions was the acquisition of Vividion by Bayer. Most of the other deals focused around small number of projects or even just one project. When it comes to our partnership with BMS, we are excited about the opportunity to continue and expand our partnership with a leading company in the field. We believe that the scope, the length, and depth of the collaboration is unique in the industry and sets Evotec apart from all the other players. Let's take a step back and briefly talk about how targeted protein degradation works, which is shown on page 19.
Targeted protein degradation works very differently from traditional small molecules, which usually functionally inhibit target proteins by binding to one of their active sites. In contrast, small molecule degraders also bind to their target proteins, but here the binding triggers proteolysis of the target protein and thus complete abrogation of the target protein as well as all its function. Triggering the degradation of the target protein is a multi-step process, as shown here. It involves a specific binding of a small molecule to a target protein with the concurrent recruitment of an E3 ligase. The E3 ligase is then able to ubiquitinate the target protein, which subsequently shuttles it to the proteasome, and this is where it's then ultimately degraded. Once again, proteolysis of the target protein not only abrogates its function on a particular active site, but completely removes the protein with all its functions.
Through this very different mechanism of action, molecular glue degraders have enormous potential in the field of small molecule therapeutics, which we briefly want to discuss on page 20. As I already mentioned, small molecule therapeutics are the mainstay of the industry. Taking a drug orally is clearly the preferred way of administering a drug. Unfortunately, many potentially highly effective drug targets lack suitable small molecule binding sites to inhibit their function effectively via traditional small molecule inhibitors. Small molecule degraders have demonstrated the ability to target even these historically undruggable target proteins. This is particularly important considering that about 90% of the human proteome cannot be targeted via traditional small molecules. Small molecule degraders are expected to significantly expand the universe of small molecule drug targets and thereby open up opportunities to develop novel breakthrough drugs and that are orally available therapeutics.
Besides being able to target drug targets that are historically seemed undruggable, small molecule degraders have also a number of other advantages over traditional small molecule inhibitors. Small molecule degraders work catalytically. That means that once they have triggered the degradation process of a target molecule, they can do this again and again, and therefore require usually smaller doses than traditional small molecules. Furthermore, as a degrader target protein, they are less likely to lead to the development of resistance. These advantages and the tremendous potential of targeted protein degradation has obviously been recognized by the industry. On page 21, you can see that as of today, more than 150 protein degradation-based therapeutics have been reported to be in discovery and development in the industry.
Currently, the vast majority of these are being explored in the context of oncological indications, but others are sure to follow. What is of interest to note, though, is that the focus is currently still on PROTAC molecules rather than molecular glues. PROTACs, which stands for proteolysis targeting chimeric molecules, are fairly complex molecules and are not very drug-like. They usually have two functional ends connected by a linker, which makes them bulky and unattractive from a number of perspectives. On the other hand, we have the molecular glues, which are much more elegant and drug-like molecules, and they have a number of advantages over PROTACs, which are summarized on the next page. In contrast to PROTACs, molecular glues are more drug-like and also have better pharmacological properties.
In addition, they are usually more synthetically tractable, and for this reason are also more attractive from a cost of goods perspective. However, historically, PROTACs can be more easily pursued via a rational drug design approach against almost any particular target. For molecular glues, rational drug design against a particular target has been more challenging because the structure activity relationships were less obvious for these kind of molecules. However, combining BMS's extensive experience and unique and extensive molecular glue library with Evotec's high-performance Omics platforms is the first unbiased and highly systematic approach to identify and develop a pipeline of molecular glues, and are a great opportunity to develop a joint pipeline of molecular glue-based therapies. BMS is clearly the key pioneer and leader in the field of targeted protein degradation, and in particular, molecular glues, as you can see on page 23.
They were the first to elucidate the mechanism of action of molecular glues. BMS has successfully built an exciting pipeline based on molecular glues, and of course, BMS generated over $15 billion in sales based on drugs which act as molecular glues already. Furthermore, over the last three years, they have assembled a unique industry-leading library of molecular glues, which is generally referred to as CELMoDs. CELMoD stands for Cereblon E3 Ligase Modulatory Drugs. This is just another way of describing a molecular glue. Together with BMS, we created a partnership to explore if it was possible to systematically identify molecular glues using an omics-based approach, and this is shown on page 24. This collaboration, which initially was exploratory in nature, proved to be highly productive in identifying high potential molecular glues.
This is the reason why we decided to expand this collaboration into a long-term strategic partnership. As I already mentioned, Evotec will contribute a number of platforms, but most importantly, our PanOmics and PanHunter platforms, which are uniquely suited for this purpose. On page 25, we just want to give you a little bit of flavor on what sets Evotec's PanOmics platform apart from other maybe similar platforms in the industry. At Evotec, we have built a unique proprietary omics generation platforms specifically for transcriptome and proteome data generation. These platforms, which are called ScreenSeq and ScreenPep, are not only highly versatile when it comes to what cell and tissue types can be analyzed, but even more importantly, these platforms operate at unprecedented scale and deliver unprecedented quality of data. I just wanna mention a couple of metrics.
Our transcriptomics platform operates at high throughput in 384-well format and still quantifies up to 15,000 genes per sample. This is a resolution that is usually only achieved via deep sequencing. Similarly, our proteomics platform is able to process `10s of thousands of samples annually, quantifying up to 10,000 proteins based on single shot proteomics. What makes Evotec platforms unique is really their overall performance. They are unique, highly industrialized platforms which operate at unprecedented scale and deliver highest quality data in the most cost efficient manner. As our platforms are delivering absolutely huge amounts of omics data, these data require a unique infrastructure for analysis, which is shown on page 26. Exactly for this purpose, we have developed a platform that we call PanHunter. PanHunter can manage and integrate huge amounts of omics data coming from patient samples as well as pharmacological data.
The user-friendly integration of these data sets, together with embedded AI machine learning data analysis tools, allows data scientists to focus on answering key questions to drive their project forward rather than struggling to apply an AI machine learning algorithm to a particular set of data. This enables us to better select the most promising molecular glues, even very early in the process. We can better predict the efficacy and safety profiles of these compounds and accelerate their transition from leads to candidates to IND, as well as ultimately select the most appropriate patient populations for clinical development. We hope that this presentation has given you a little more insight into our strategic partnership with BMS in the field of targeted protein degradation. In many ways, the field of targeted protein degradation is still at its very beginning.
There are clearly further opportunities in the space that go far beyond PROTACs and molecular glues and even the proteasome-driven targeted protein degradation. At Evotec, we continue to invest into these areas to create further partnership opportunities in the future. With this, I would like to thank you for your attention and hand you back to Werner.
Cord, thank you so much for this crash course in targeted protein degradation. This was 15 minutes, science as beautiful as it gets, and how we transform science into high-value partnerships. You will also see this is not only transforming science into partnerships, this will be science transformed into co-owned products, which is our strategy. When you go to page number nine of this presentation, let me step back because it's not only a company that's delivering science and co-owned products, it's also a company that is delivering our contribution to the planet and to make the world a better place. With this, we will continue to report on our ESG and sustainability measures as we have taken them also in Q1, for example, by really starting to follow our science-based initiatives in many areas.
We also on a governance level are making a lot of progress and want to intensify our stakeholder dialogue on multi dimensions here. Page 30 goes back into our business. You will see that we are significantly growing this company the 10th year in a row now by more than 15%, which is illustrated on our guidance here. You will see that our unpartnered R&D will lead to significant partnerships also still this year. As already mentioned, our EBITDA is a function of how much money we spend into R&D and also how much money we spend into growth into the future. There will be clearly at least a stable EBITDA this year, if not more.
When you go one page forward, let me also confidently confirm our midterm aspirations, where we often say that we are just at the beginning, but it is just beautiful to see that there is no slowdown on the R&D Autobahn to Cures into the year 2025 and beyond that. It's actually fair to say that on some of the aspirations, we feel that we are even ahead of the curve than we had planned this initially, but too early to tell in all details. When you go forward to the last page, you will see that we are setting the pace also for this year in many dimensions. You will see strong news flow coming from our R&D efficiency platforms with multiple integrated R&D collaborations to come.
You will see that we, in our precision medicine platform, we do everything with our partners to bring probabilities of success up, and with this have a better chance to bring our co-owned pipeline to the market. Last but not least, we are very happy about the progress of our Just – Evotec Biologics, where we have started not only to complete our J.POD one, but where we are also making great progress in building J.POD number two in Toulouse. You will soon hear about multiple partnerships that we are making in our Just – Evotec Biologics platform. With this, thank you for your attention. Thank you for all your questions to come now. We are more than happy to answer them.
Thank you. We will now begin our question and answer session. If you have a question for our speakers, please dial zero one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it is your turn to speak, you can dial zero two to cancel your question. If you're using speaker equipment today, please click the handset before making your selection. One moment, please, for the first question. The first question is coming from James Quigley at Morgan Stanley. Your line is now open.
Great, thank you for taking my question. On the BMS contract, can you give us an idea of how you expect to recognize the EUR 20 million upfront, whether it's straight line or more of a proportion of completion basis? This deal is somewhat different to some of the others signed this year, given there's a big upfront. Can you confirm that the royalty on the back end is similar to the Lilly, for example, and within your sort of, I think it's 8%-10% range that you have had traditionally? Finally, on the BMS, if you can give us an idea of how the milestones are split. One more question on Bristol as well. You mentioned there's about five CELMoDs in development in their pipeline
What are they trying to achieve or what's the question they're trying to answer by using your platform, by using the molecular glue degraders through your discovery partnership, as opposed to what they're seeing already with Iberdomide, particularly in myeloma, where that's shown some good data. Then finally, just picking up on Just – Evotec Biologics. I think there's been some questions this morning around the year-on-year growth rate, but then also on the sequential growth for Just – Evotec Biologics. There's quite a bit of a step down from Q4 where things around EUR 18 million-EUR 19 million in revenues for Just – Evotec Biologics and EUR 12.5 million or so in the first quarter. Could you give us an idea of the dynamics there?
Was there sort of a flurry of demand back end of last year as companies spend their R&D budgets? Are there any other impacts in terms of batch to batch variability or anything like that that may have impacted the sequential as well as the year-on-year comparison for Just – Evotec Biologics? Thank you.
Yeah. Thank you, James. We'll do the following. We'll answer the Just question first, we'll then go to the CELMoD rationale question on the platform, and then we'll go back to the commercials on the BMS deal. Let me start by Just and then hand over to Craig. We are very happy with the progress of Just Evotec Biologics, including our J.PODs. A view from a month-to-month basis on the business that we are building there just would, I think, really confuse you on a too high level on something where we see significant demand that is building up there. That's why I wouldn't worry at all there. Maybe, Craig, you can illustrate it a bit better.
Yeah, I'll certainly try, Werner. Thanks for the question, James. As Werner said, we're really happy with what's going on. I mean, to your specific question about, for example, the Q4 to Q1, of course, inevitably there are some revenue recognition elements of completion of batches and so on.
Mm-hmm.
Actually the main driver for a shift between Q4 2021 and Q1 2022 is that during the course of 2021, there were revenues that were being brought in and recognized as we progressed through the completion of construction and indeed technical and operational readiness, which came to an end when the facility opened in Q4. What you see in Q1 is all customer-driven, partner-driven demand and revenue recognition.
As Werner warns, and as I'm sure you're familiar with, there will be a certain amount of up and down as the immediate future view for Just and hopefully you can bear with us and watch out for the news flow that we look forward to sharing with you during the course of the year.
Okay. Thank you so much. With this, maybe, Cord, I hand back to you on the synergistic platform from Evotec to the BMS pipeline building activities.
Yeah, gladly. Unfortunately, I cannot comment in any detail here on what indications we are in particular targeting other than that oncology is clearly a key area of interest. I think what I can say is though that we are clearly shooting or selecting for high value drug targets, which are either traditionally undruggable targets. So basically, so far they you know they clearly have drawn the interest of the industry, but people have just not been able to develop classical or conventional small molecule against these targets. Or for targets where a target protein degradation approach is simply superior even against traditional small molecule approaches.
There are a large number of these potential drug targets out there already, but through this approach and in particular through our omics-driven approach, so that it allows us to get to these faster and quicker and to select them more precisely and earlier.
Thank you so much, Cord. With regards to your more commercial question on the transaction, I think it's fair to say on the milestone split that we're not talking about end-stage milestones only. We are talking about very near-term achievable milestones in the pre-clinic, actually already in the discovery phase. With this, there is a significant milestone potential really near-term in these EUR 5 billion, which you will see once we achieve certain elements here. When we talk about royalties, it's tiered royalties which can go beyond 10%, which is also fascinating from a recognition of the power of our technologies in this transaction. Overall, 8%-10% average royalty rate on our co-owned pipeline that not only applies to this transaction is, I think, a very good estimate to apply.
When it comes to revenue recognition, we have not shared the final agreement with our auditors at this stage. That's why we cannot fully comment because we have just signed the full agreement yesterday afternoon. There will be two elements. One is, of course, a time element of the EUR 200 million, depending on how we phase the work here. The second element is elements of completion, which are basically to be finalized with our auditors first, and then we can give more color here. You will see both elements that will lead to revenue recognition here. This may be also last sentence here. We have a part of this transaction, of course, always assumed to be part of our top line this year.
How much of this falls into our bottom line? We'll definitely see once we have done the full analysis, and we are working on this analysis.
Great. Thank you.
James, I hope that answers your questions. With this, we go back to the next question.
The next question is coming from Zoe Karamanoli at RBC. Your line is now open.
Hi. Thanks for taking my questions. Two questions from me, please. First, on guidance. You're growing faster than your guidance implies. Yesterday you announced the extension deal with BMS with the significant upfront for this year. However, you have reiterated your guidance for this year. Could you help us understand what's holding you from raising guidance and what are the things that we should be aware of? That's the first question.
Yeah. Second question.
The second question is on the investment in Evotec equity. If you could elaborate where those investment opportunities derive from. Is it from our portfolio of Evotec Innovate or is it outside this?
On guidance, Zoe, thank you so much for your question. First, it's early in the year. Second, we see a very strong order book, actually the strongest order book in the company ever. Thirdly, at this stage, we see, and that's not only true for Evotec, it's true for many other companies as well. We see many more insecurities when it comes, for example, cost increases, supply chain increases than before. We are constantly double-checking all these processes. We have just started to review this process again, and I think with this it's very fair to say that we can confidently confirm our guidance on the basis of a strong order book, a strong outlook and a strong deal pipeline.
It would be just too early in the year to change the guidance that we have very diligently prepared for the first quarter and also for now. Again, it's something that we constantly monitor. When it comes to Evotec equity, we have multiple sources of where we find our sweet spots to invest. There is one element which has to be always in place, that there is an operational synergy of the companies where we invest to Evotec's platforms. Because this principle of the sharing economy where we wanna learn together and make things better together, that's really across the board of all our co-owned companies, the case when it comes to where does deal flow come from.
Deal flow comes from our network, comes from outside of Evotec, comes from invitations of our partners in the venture world, comes from invitations from other companies who want to create companies together with, like, with us, like for example, Sartorius. There's a multiple source deal flow, which then very diligently is explored on our platforms, and then we are investing in these companies. We have, of course, also the opportunity to spin out companies that we are generating on our R&D platforms within EVT Innovate, and here we are, as we speak, working on certain opportunities as well.
Great. Thank you.
With this, I hope this answers your question.
Yes.
The next question is coming from Joseph Hedden at Rx Securities. Your line is now open.
Good afternoon. Thanks for taking my question. I've got two. Firstly, on the gross margin, you highlighted some reasoning behind why that's a little lower this quarter. I'm just wondering what your expectations are for the rest of the year. Are these pressures set to continue or do you expect a rebound? And then secondly, on the BMS deal, congratulations by the way. Slide 23, just looking at the oncology kind of the pipeline here, of the projects that Celgene and these other companies have, and they're all in the oncology space. Now, is this purely because these are, you know, these companies have big research interest in oncology or is there some kind of reason that the molecular glue approach is more suited to oncology than other disease areas?
Yeah.
Thanks.
The gross margin question goes to Enno and other areas for protein degradation, Cord Dohrmann, would be great if you then comment as well.
Okay. Joseph, pleasure having you on the call here today. On the gross margin, there are a few things that will stay. Like for instance, I was referring to the increased level of depreciation, thanks to building and going online with the site in Redmond, for instance. Ramp up cost of Just is also there still for this year to continue. On the other side, if you look at Q1 in particular, you will recognize that similar to last year, we did not have significant milestone income.
If you compare that, for instance, against a quarter of Q4 of last year, and also here, I mean, clearly we want to achieve further milestones this year and depending on those, you could expect on average that the gross margin should increase compared to where we have been in the first quarter.
Which is by the way a pattern throughout every year if you follow us in the last 12 years. Maybe Cord Dohrmann on CNS and other areas.
Sure. In the targeted protein degradation field, each and every company, of course, sets preferences according to disease area indication that they entered according to their own strategic goals. That is not necessarily always adequately reflected in the still early stage pipelines. However, the oncology field, of course, always draws particular attention, mainly because over the years it has assembled quite a large number of potentially very high value drug targets where the pharmaceutical industry has simply not been able to find adequate molecules to target them. In that regard, there's a little bit of a backlog, I would say, of potential drug targets to go after using a new modality such as targeted protein degradation.
Here in particular, you know, using PROTACs, because here the rational design approach is simply a bit more straightforward, even though the molecules themselves are clearly less attractive than molecular glues. We feel that the molecular glues will, over the long term, clearly dominate the field because they are simply much more attractive small molecules from a chemical and pharmacological perspective. It's just, like I said, been more difficult to use a rational design approach here. But this is, you know, with the approach we are taking with BMS here, which is, once again, highly unbiased, very systematic, is something that is becoming much less of a bottleneck.
I think it's fair to say that areas where molecular glues and targeted protein degradation will be found is in CNS, is also in infectious diseases, just to name two areas where you will see this field also evolving. Maybe we go to the next question.
Okay.
The next question is coming from Christian Ehmann at Warburg Research. Your line is now open.
Hello everyone. Thanks for taking my question. I have well, two. I know the question about gross margin company-wide was asked already, but I hope that you would give us more, a little bit more guidance and what revenue contribution and gross margin you expect to develop over the year as it has a considerable impact on your gross margin overall or at least for the EVT Execute segment. The second question is more in line with scientific one. What exactly is the difficulty in developing or identifying certain molecular glues. I would imagine something like steric hindrance or something which makes it much more complex to predict those molecules, but maybe you can give us a few insights how this differentiates you from other parties. Thank you.
Thank you so much, Christian. On, I would say, the broader outlook and also the gross margin implications and capacity build-up, Craig, it would be great if you give us a bit more color again, and then I'll hand to Cord again on the CELMoD question.
Sure. Thanks, Werner. Christian, thanks for the question. You're right, of course, that the costs in the J.POD, the fixed costs in the J.POD are substantial. It's a big facility, and the full impact of that, or pretty much the full impact of that, is carried in the Execute segment. But that's actually why we're actually quite satisfied and pleased that the trajectory in Q1 indicates a baseline for this year, and that we're looking forward very much to a revenue build-up as the year goes on, which will then progressively, if you like, dilute the fixed cost. This is really a phenomenon of starting a large facility, which really came online in Q4 of last year.
Of course, we're really in the transition as we look over the next 12 months to fully build up, fully utilize, and fully have the pipeline flow of deals and business that will take us into 2023 and beyond.
Great. I hope that answers your question. With this, again, to the CELMoD part and the scientific element here to Cord Dohrmann.
I think the question about the sort of what are the key hindrances sort of in the field of developing targeted protein degradation approaches and in particular, molecular glues. Simply said, the field in many ways is still in the very beginning. As I alluded in the presentation, targeted protein degradation currently is mainly focused on using the proteasome of the cell to essentially shuttle proteins that would usually do their function to the proteasome for degradation. This involves, in particular, E3 ligases that basically trigger ubiquitination event of the target protein and then ultimately leading into degradation to a degradation event.
The key problem here is that with molecular glues in particular, the structure activity relationships are not as well understood as in many other areas. In my view, this is just a matter of time and numbers of molecules to be made in the future to better understand exactly how the structure activity relationship works and how exactly a molecule needs to look like in order to present it in the right conformational way for a ubiquitination event and ultimately a degradation event. I think this will definitely move forward. The other hindrance is that currently the field is very much focused on one or very few E3 ligases that are currently explored in the context of targeted protein degradation.
However, in the genome, we know that there are on the order of 600-700 or more E3 ligases in the system, and many more E3 ligases are probably suitable for similar targeted protein degradation approaches. Once again, the field is still in its very beginning, and I think that once again, in particular, BMS through their extensive experience with molecular glues already, and also in particular their CELMoD library, which is essentially by far the largest collection of molecular glues in the industry. Plus their deep understanding of the mechanism of targeted protein degradation via the proteasome in particular is absolutely industry-leading.
As I also mentioned already, you know, we bring a key component here with the omics-driven approach to this particular program problem, which just really fits here extremely well, as well as in other areas, though. I think we together be extremely well-positioned to really bring molecular glues all the way to the forefront in this field going forward.
Thank you, Cord Dohrmann.
Okay. Thanks, everyone.
Thank you so much. I have the next question here from Peter Welford. I don't know if your line can connect, but it would be great to have you on the call here.
Yes. Next question is coming from Peter Welford. I'm opening his line right now.
Hi. Hope you can hear me.
Perfect.
Great. Sorry if you heard this before. Thank you for that. I've got a few questions. Firstly, if I could just add on the Just – Evotec Biologics, I wonder if you could talk a little bit about the type of customer you're engaging with and seeing demand from here. I guess curious if you can possibly give us a split based on internal versus pharma versus biotech. The reason for the question partly is I think particularly it'd be good to know how much is your exposure there to the biotech customers, 'cause I know there are some who are obviously concerned given the funding environment, what that could be.
If you could talk a little bit about the demand you're seeing there, that would be helpful. Just on CapEx, I wonder if you could just talk a little bit about the phasing of the CapEx we should be considering for this year. Obviously, relatively big year for CapEx. We've seen some already in the first quarter. How should we think about the phasing over the coming quarters? If I could push you on 2023, how much less CapEx, I guess, do you think potentially at this stage we could anticipate for 2023? If I could just ask on the Bristol deal, curious here in terms of is the deal exclusive in terms of particular targets of interest that BMS elects to opt in on and then locks up those targets?
Equally, and you mentioned this in terms of the E3 ligases, can they lock up certain E3 ligases within this collaboration that others then can't work on? Equally, is it possible for them to lock up certain, I guess, hooks or linkers within the molecular glues that you're using? I guess, just curious in terms of what sort of exclusivity they have or really is this just very, if you like, just candidate specific? That'd be great. Thank you.
Yeah. Thank you, Peter. I will hand over on the exclusivity to Cord at the end, to Enno in the middle, and let me give you a color on Just – Evotec Biologics directly. We are, as disclosed, working a lot and hopefully even more with the Department of Defense, which is not exposed to any biotech slowdown in funding. We are working a lot and hopefully in the future more with Merck KGaA as our first pharma partner that we have already signed up for a pilot in Just – Evotec Biologics, and we are discussing at this stage and also have signed up with multiple pharma partners, multiple biotech partners, and we don't see a slowdown or a danger of biotech funding within these customers at all.
Of course, we are fully aware of the market situation, but it's not the partners that we are at this stage seeing who would have no funding available. It's really that our technology fits to their situation in their value chain, what is more driving this question. The second customer segment that we want to highlight is that we are working a lot, as you know, with, for example, foundations like the Bill & Melinda Gates Foundation, who is a very fond customer of our technology there because we can address disease areas with our biologics that otherwise cannot be addressed with other technologies, like for example, infectious diseases. Thirdly, we are also working on projects that are coming from our internal pipeline and our co-owned pipeline in the future within Just – Evotec Biologics.
To address the question, do we see any impact of the slowdown of the funding environment on any of our business lines at this stage? I have to say no, because that with this, I think I can underline this again with what I have already pointed out, the strongest order book that we have seen in the history for 2022. A lot of that is also already order book, which is building up into 2023, especially in biologics, because as you know, these are very long-term phased projects. The same is also true for our development business, where there is very long-term phased business that is already part of our order books. I go back to the exclusivity question, Cord, and maybe you can comment on that.
Yeah. Happy to do so. Yes, in regards to exclusivity, yes, there are exclusivity provisions in the contract, of course. Generally, Evotec structures exclusivity around individual targets where we have co-ownership in terms of milestones and royalties. In this particular contract, because it is long-term and very strategic, there are some additional exclusivity provisions that I don't wanna comment on here. I would say, looking at the whole field of targeted protein degradation, and it's sort of been, I alluded to that in slide 27. The whole field is much bigger than what we currently work on together with BMS. There are many more opportunities where Evotec is actively investing into alternative strategies.
You know, I already mentioned there are very interesting other ways than going via the proteasome when it comes to targeted protein degradation. There are ways to particularly target cell surface ligands. There are ways to go via non-E3 ligases. Then there are a whole universe of additional ligases that are currently not pursued by the industry.
Thank you so much. On the CapEx question, back to Enno.
Yes, Peter. Happy to take the CapEx question, where we have seen roughly close to EUR 45 million in Q1 of CapEx, and we will continue to significantly invest, so that we would expect some final amount for the full year in the range of probably EUR 250 million-EUR 300 million, more on the 250. Currently outstanding here is really the second J.POD, which we are now starting to build, having the kickoff for the building construction site in
Hopefully this summer. That said, we have already pre-ordered quite a bit of CapEx, so that will be a very significant amount of the total expenditure. The other part is really about expansion growth. As I said before in the call, basically currently investing at every single facility, aside obviously from scaling the technology platforms and our capabilities also in that regard. You should expect to be in that range and also for 2023 going forward. Obviously, this construction site will still be there. We obviously want to go online here in 2024. It will remain on a high level.
A little bit challenging to say whether it will come down significantly compared to what we have this year as other things like finalizing the J.POD one in the U.S. will come to an end, once we have ramped up.
Maybe an additional comment here. If you go back to our prospectus when we went public in November, October of last year, this was very clear our intent and our use of proceeds to also invest into CapEx. That's why I think it is important also to say that we are doing what we promised our investors to do with this money.
Yeah, that's right.
Going to the next question. If this answers your questions, Peter. Pleasure. Is there a next question in the line?
Yes. There's one more question coming from Victoria English at MedNous . Your line is now open.
Yes. Werner, you mentioned CNS briefly.
Mm-hmm.
In the course of the question and answers about target areas for molecular glues. Without commenting on your BMS deal, I'm just wondering whether, in general, you see neurological diseases as a potential area for this technology. I'm thinking in particular in getting a hold of amyloid beta.
Hi, Vicky. Great to hear you. Nevertheless, the competent or more competent person on the call to answer this question is Cord Dohrmann.
Hello. Thank you for your question. In principle, targeted protein degradation approaches, as I said, are, of course, broadly applicable to essentially almost any indication. We currently have in our collaboration with BMS a focus on oncological indications. I think it's fair to say that we have not excluded any potential indications at this point in time. We do have, of course, a vested interest in the neural space through our other BMS collaboration. I think it's fair to say that you know, here we are, of course, open to create synergies between these.
It's something once again where we feel we really wanna go for the sweet spot of the targets, essentially target space. That's really the key driver of that.
Thank you.
Thank you.
Thank you so much. I don't see any further question in the row here. With this, let me thank you so much. Let me also highlight that we will, of course, put all the slides on our website. If there are any while studying the materials, please reach out to Volker directly or to anyone of the management team. We are more than happy to answer all your questions. With this, have a great day, and thank you for following Evotec.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.