Business Review

Encouraging progress within custom projects pipeline

Lower profitability for the first half of 2022

PolyPeptide generated EUR 133.7 million of revenue in the first half of 2022, representing a decline of 1.1% versus the strong previous-year period. At constant currency rates, the revenue decline was 3.3%. The gross profit was EUR 37.8 million (versus EUR 51.2 million in the previous-year period) with a gross margin of 28.3% (37.9%). Adjusted EBITDA1 for the period was EUR 26.7 million (EUR 43.2 million), with an adjusted EBITDA margin of 20.0% (32.0%). The result for the period was EUR 10.2 million (EUR 24.6 million).

While the Group had expected a broadly stable revenue and a lower margin for the first half of 2022, it faced challenges within a more demanding market environment. This included having to manage more variations from its original production and delivery schedules than usual, partly driven by external market developments and partly due to internal operational reasons. Revenue shifted towards the end of the reporting period, with several deliveries also slipping into the second half of the year.

The drop of adjusted EBITDA was driven by the cumulative effect of several factors, including an impact of EUR 13.3 million due to a 12.7% increase in average FTEs since 30 June 2021, mainly in Operations and Quality to manage growth; EUR 8.0 million due to higher-than-expected input costs amplified by the surge of inflation in the second quarter, including wage adjustments; EUR 2.7 million due to higher-than-expected maintenance costs; and EUR 3.1 million from other costs, including travel, insurance, marketing and scrap. The drop in profitability was partly offset by EUR 2.1 million reflecting a change in product mix compared to the prior-year period, as well as the build-up of inventory for work in progress with an impact of EUR 8.4 million, the latter reflecting the growth aspirations for the second half of the year.

1 For the first half of 2022, no adjustments were recognized; adjusted EBITDA for H1 2021 excludes one-off IPO costs of EUR 5.7 million, partly offset by US government loans of EUR 2.4 million waived in context of the coronavirus pandemic.

Custom project pipeline and capital deployment

PolyPeptide witnessed continued research and development activities by customers throughout the first half of 2022. It was able to further grow its custom projects pipeline, which resulted in a total of 218 active projects at the end of June 2022, compared to 181 projects at the end of June 2021 and 196 projects at the end of 2021. Newly acquired projects are typically in early-stage development and included several oligonucleotide projects.

The number of projects in phase III of clinical development remained stable at 30 projects, with two phase II projects moving to phase III and two commercial launches during the reporting period, reflecting the continuous progression within the active custom projects pipeline. In relation to the two phase III projects achieving commercial launch, the associated revenue shifted from Custom Projects to Contract Manufacturing. This impacted the revenue split for the reporting period, with revenue in Custom Projects dropping by 4.7% and increasing in Contract Manufacturing by 5.8%.

Given the anticipated future volume requirements from the active custom projects pipeline, PolyPeptide continued its infrastructure investments. Capital expenditures for the period reached EUR 37.9 million or 28.4% of revenue, versus EUR 25.0 million or 18.5% in the previous-year period.

Investment projects included the continued construction of large-scale solid phase synthesis capacity in Braine-l’Alleud (Belgium), large scale downstream capacity in Malmö (Sweden) and freeze-drying capacity in Malmö and Torrance (California). They also included further efforts related to the implementation of the Group’s green chemistry agenda, the ongoing strengthening of our analytical capabilities, as well as numerous IT and digitalization efforts.

Cash flow, changes in net working capital and cash position

The free cash flow for the period amounted to EUR -48.9 million, with net cash flows from operating activities (excluding the changes in net working capital) of EUR 17.0 million and net cash flows from investing activities of EUR -41.2 million. The net cash flow from the changes in net working capital was EUR -24.7 million, driven by the build-up of inventory (EUR -27.2 million) and reduced contract liabilities (EUR -12.8 million), partly offset by lower trade receivables (EUR 18.8 million).

Inventories were increased to meet customer requirements for the second half of the year and to ensure sufficient safety stocks given a challenging global supply chain environment. The reduced contract liabilities related to the manufacturing of batches that were pre-paid by customers in context of earlier volume commitments.

Cash and cash equivalents reached EUR 66.4 million (versus EUR 136.3 million at the end of 2021), also reflecting the purchase of treasury shares and the dividend payment in May 2022 in the form of a cash distribution in the aggregate amount of EUR 21.6 million. With total financial debt of EUR 31.1 million, the net cash position of the Group was EUR 35.4 million as at the middle of 2022, with an equity ratio of 73.8%.

Organizational development and operational improvements

PolyPeptide continued to build and develop its organization to cope with customer expectations and the planned growth for the second half of 2022 and beyond. In May, a new Chief Human Resources Officer joined the Group as a member of the PolyPeptide Management Committee (PMC) to further strengthen the processes to attract, develop and engage employees.

At PolyPeptide, raw materials, energy and personnel costs combined typically account for around three quarters of the total cost base. To protect profitability within a more inflationary environment, the Group launched measures to pass-through higher input costs to customers more effectively. The effort is consistent with its “cost plus” approach and is expected to incrementally materialize in the coming months, as the Group executes on a significant number of purchase orders with previously fixed prices, some of which are committed up until the second half of 2023. For new projects, however, updated rates and terms are being implemented with immediate effect.

Under its integrated strategy, the Group continuously strives for innovation, including to improve productivity, for example by optimizing manufacturing and analytical processes and harmonizing systems. An example of the progress made in the reporting period is the continued roll out across sites of digital business applications in Operations and Quality.

Long-term business plan and strategy implementation

PolyPeptide operates in a market with significant opportunities. Within its active custom projects pipeline, around half of the projects are in two fast-growing therapeutic areas, metabolic disorders (including diabetes and obesity) and oncology. To capture the potential, the Group plans to continue investing in its manufacturing capacities, to strengthen its OnePolyPeptide organization and to pursue business development opportunities.

It aims to be the preferred partner for its customers, building on its strong position in peptides and its full commitment to develop its oligonucleotides offering. Given the expected dynamics emerging from its pipeline, the Group is preparing for a significant growth of manufacturing volumes that is projected to outpace its anticipated revenue growth. To create the capacities, the Group plans for further investments at all current locations, with the site in Braine-l’Alleud having the largest expansion potential.

Given the expected significant increase in manufacturing volumes, the Group places great importance on the principles of green chemistry. To optimize the usage of hazardous solvents, progress was made during the reporting period with the implementation of a new washing process where possible. The required infrastructure is now deployed to all large equipment with installations on the mid-sized equipment, ongoing. Criteria related to the reduction, recycling and replacement of hazardous solvents are now part of the Global Balanced Scorecard for 2022.

Guidance for 2022 and mid-term outlook

PolyPeptide undertook considerable efforts in 2020 and 2021 to support the global fight against the coronavirus pandemic, also by making its core purification process capabilities available at large scale. In 2021, around EUR 63 million of revenue was associated with the pandemic, followed by around EUR 33 million in the first half of 2022, broadly stable versus the first half of 2021. Consistent with the market update provided on 12 July, an agreement was reached to shift a portion of the pandemic-related business on order for the second half of 2022 into 2023.

For 2022, PolyPeptide therefore now expects revenue growth of between 8% to 10% (reduced from the earlier expectation of 12% to 14%), which implies healthy growth from the peptides business. The adjusted EBITDA margin is now expected at between 22% and 25% (reduced from “around 30%"), given continued inflationary pressure. The level of capital expenditures as a percentage of revenue remains unchanged at over 25% of revenue.

PolyPeptide recognizes that the nature of the pandemic is changing, that the macroeconomic environment has become more demanding and that geopolitical developments are unpredictable. However, it has confidence in the structural growth opportunities in its market and more specifically in the potential of its pipeline of customer projects.

For the mid-term, PolyPeptide expects to grow its business with a revenue CAGR in the low-teens, though with varying growth rates year-by-year. It also expects to continuously progress the adjusted EBITDA margin towards 30%. This updates the previous mid-term outlook, which anticipated year-on-year low-teens revenue growth with an adjusted EBITDA margin of approximately 30%.