Evotec’s Q1 2024 earnings call [Transcript Link] was a carefully orchestrated performance, skillfully navigating a narrative of "reset" and "right-sizing" amidst a challenging market environment. But hidden beneath the surface lies a shift in strategy, a stealthy pivot that has implications reaching far beyond the immediate financial performance. This isn't about a mere cyclical downturn; this is about Evotec redefining its identity in the face of a changing drug development landscape.

The core of this strategic shift lies in the company's evolving relationship with its star partner, Bristol Myers Squibb (BMS). While the management team confidently assured investors that the BMS partnerships "continue to make good progress," they also dropped a bombshell: BMS revenue contribution for 2024 is expected to hover around 10%. This seemingly innocuous statement belies a significant retreat from the 25% revenue share BMS commanded in 2023, a figure gleaned from Evotec's annual report.

This isn't about a dissolving partnership; it's about a conscious decoupling. Evotec is weaning itself off its heavy reliance on a single customer, opting instead to diversify its client base and strengthen its appeal to a broader spectrum of partners, particularly in the burgeoning field of biologics.

The rationale is clear: risk mitigation. Over-dependence on a single client, however lucrative, exposes Evotec to the vagaries of that partner's pipeline and strategic priorities. A diversified client base offers greater stability and cushions the company from potential shocks originating from any one partner.

But this decoupling comes at a cost, a cost that explains the "trough" Evotec is currently navigating. The 70% surge in discovery sales, while encouraging, won't immediately translate into revenue. As the management team admitted, this high-value work, largely driven by integrated discovery deals, involves lengthy lead times, stretching anywhere from 6 to 8 months or even longer.

This lag effect, combined with the waning BMS contribution, casts a shadow over the company's short-term financial performance. Q2 is not expected to demonstrate substantial revenue improvement over Q1, despite facing an extremely weak comparable base due to the cyberattack that plagued the company last year.

This paints a picture more nuanced than a simple "H1 trough, H2 recovery" narrative. The trough is deeper, the recovery potentially slower, as Evotec adjusts to a lower base revenue level and awaits the fruition of its newly secured discovery deals.

Furthermore, the company's admission that its transactional business, representing roughly 20% of its revenue, is facing significant pressure adds another layer of complexity to the recovery story. While Evotec is tight-lipped about the extent of the potential decline, it's reasonable to hypothesize a significant contraction, potentially in the double-digit range. This, coupled with the lag in discovery revenue and the reduced BMS contribution, suggests a more protracted and challenging path towards profitability than the management team's carefully crafted narrative implies.

Evotec's stealthy pivot towards biologics, embodied in the phenomenal growth of its Just Evotec Biologics segment, presents a compelling long-term growth story. The segment, already profitable in Q1 2024, is poised for continued expansion, fueled by the Sandoz partnership and a burgeoning sales order book exceeding €900 million.

But as Evotec navigates this transition, the stock is likely to face significant near-term headwinds. The decoupling from BMS, while strategically sound, will weigh on financial performance until the new discovery deals reach revenue maturity. The weakness in the transactional business further complicates the recovery trajectory.

The appointment of Dr. Christian Wojczewski, an accomplished leader with a track record of transformational change, instills confidence in Evotec's long-term prospects. But until the new CEO unveils his vision and provides concrete guidance, investors should brace themselves for a period of uncertainty and potential volatility. The "reset" is underway, but the road to profitable growth is longer and more arduous than the company's carefully crafted narrative suggests.

Evotec's Revenue Breakdown: Shared R&D vs. Just Evotec Biologics

Based on information from the Q1 2024 earnings call, Evotec's revenue is roughly split between Shared R&D (which includes former Execute and Innovate segments) and Just Evotec Biologics. The chart below illustrates the approximate breakdown:

Key Takeaways

Strategic Decoupling: Evotec is intentionally reducing its reliance on BMS to mitigate risk and diversify its client base.

Biologics Focus: Evotec's Just Evotec Biologics segment is experiencing significant growth and profitability, indicating a strategic shift towards this area.

Near-term Headwinds: The transition towards a more diversified business model will likely impact short-term financial performance.

Long-term Potential: Evotec's expertise in biologics, combined with its new leadership, positions the company for long-term growth, but the path may be bumpy in the short term.

"Did you know that Evotec's expertise extends beyond drug development? They've partnered with the European Space Agency to explore the potential of microgravity for drug discovery, sending their scientists and experiments to the International Space Station!"