Full-year 2023 results

Ludwig de Mot appointed Chief Executive Officer

Strategic Review outcome: launch of the FOCUS-27 project to improve competitiveness and unlock sustainable & profitable growth

Full-Year 2023 results: resilience in a challenging business environment

• 1,013.2 million in Net Sales, up 3.8%¹
• €93.1 million Core EBITDA, with a 9.2% Core EBITDA margin, down from 12.3% in 2022 due to unfavorable fixed cost absorption and input cost inflation
• €226.4 million impairment on Tangible Assets
• €(189.7) million Net income, compared to €(15.0) million in 2022
• €129.0 million Capex, of which 52% invested in Growth projects
• €(82.0) million Core Free cash flow, compared to €(54.2) million in 2022
• €(171.0) million Net Debt position, vs. €(25.6) million at the end of December 2022
• ESG Roadmap on track with 30% of 2030 objectives achieved – CDP² B Score awarded in February 2024

Ludwig de Mot appointed Chief Executive Officer

• Ludwig de Mot, who joined EUROAPI as EVP and Chief Transformation Officer in January 2024, is named Chief Executive Officer and will drive the accelerated transformation of the company.
• Viviane Monges will continue as Chair of EUROAPI’s Board of Directors

Strategic Review outcome: build on our strengths to refocus on high-value and growing market segments, improve competitiveness, and unlock EUROAPI’s sustainable and profitable growth potential

• Solid long-term market momentum for CDMO business and highly differentiated APIs
• Launch of FOCUS-27, a comprehensive project that will unlock profitable growth and increase returns through:
  • a streamlined value-added API portfolio:
    
    

13 APIs with low or negative margins discontinued, and focus on highly differentiated, profitable products such as Vitamin B12, Prostaglandins, Peptides and Oligonucleotides,

• a focused CDMO offer leveraging our recognized capabilities and technology platforms,
• a rationalized industrial footprint prioritizing high-return CAPEX, and a leaner organization with more efficient ways of working.

2024 key objective: focus on cash in a year of transition

Amended contractual terms signed with Sanofi

On-going discussions with our key stakeholders to finalize the implementation and financing of the project

Sanofi and EPIC BpiFrance have agreed to extend the duration of their lock-up until December 2025.
FOCUS-27 is subject to various local information and consultation processes with employee representatives. Its finalization is dependent on discussions and agreements with EUROAPI’s key stakeholders. EUROAPI plans to communicate the outcome of these steps and discussions in Q2 2024.

“The Board of Directors wishes to extend its most sincere gratitude to Viviane Monges for accepting the responsibility of managing the transition as the interim CEO of EUROAPI. As CEO, she led the organization to stay focused in a challenging business environment, strengthened our relationships with key stakeholders, and retained key talent. In her role as Chair of the Board, she will provide invaluable support to Ludwig as he leads the transformation,” said Elizabeth Bastoni, Independent Lead Director and EUROAPI’s Chair of the Nominations and Compensation Committee.

“Building on our core strengths, FOCUS-27 will accelerate our transformation into a more innovative and efficient company and deliver long-term profitable growth. In line with our values of respect, we will do everything possible to support our employees and serve our customers during this transformation period.

As CEO, Ludwig de Mot will play a decisive role in the successful execution of FOCUS-27 and the transformation of our company. I look forward to continuing to work with him and to help him drive EUROAPI to a new level in our strategic roadmap,” commented Viviane Monges, Chair of EUROAPI’s Board of Directors.

2024 outlook

In a transition year, we will focus on putting the company back on track toward sustainable and profitable growth by focusing on high-value products, prioritizing high-return CDMO projects, and improving working capital.

Full-Year 2024 guidance is the following:

• Between 4% and 7% decrease in Net Sales on a comparable basis, notably driven by a decrease in sales to Sanofi
  • A material impact of transformation and early restructuring costs, including industrial under-activity resulting from the execution of the FOCUS-27 project
  • Between 6% and 9% Core EBITDA margin
  • Prioritized CAPEX and strong improvement in Working Capital, driven by a significant reduction in inventory.

Paris, 28^th February 2024 – EUROAPI’s Board of Directors met today and approved the FY2023 results, and appointed Ludwig de Mot as Chief Executive Officer. It also acknowledged the outcome of the strategic review launched in October 2023 and the subsequent measures proposed to transform the company. Having proactively studied possible alternatives and considering it was, at this stage, its best option to regain strategic flexibility, the company launched the FOCUS-27 project.

Full-Year 2023 Results

Key figures

Net Sales

EUROAPI 2023 Net Sales reached €1,013.2 million, +3.8% versus 2022 and +3.1% at Constant Exchange Rates.

Net sales per type of activity

API Solutions' Net Sales increased 2.6% to €727.5 million

• Sales to Other clients rose 7.1%. The performance was driven by the deployment of the commercial roadmap, with 46 new clients added in 2023 in both small and large molecules, the acceleration of the cross-selling strategy, product mix, and positive price adjustments over the year despite raising pricing pressure in Q4. This was partially offset by year-end destocking programs initiated by certain customers, particularly in Africa, Asia, and Latin America. The negative impact of the suspension of prostaglandin production in Budapest in H1 2023 was more than compensated in H2 2023.
• Sales to Sanofi decreased by 1.5%. The negative impact of the progressive discontinuation of Buserelin⁴ production after its divestment by Sanofi and the decreasing demand for certain APIs was partially offset by the activation of the Global Manufacturing and Supply Agreement raw material pass-through and energy compensation clauses. In addition to the energy & raw material pass through clauses, €12m additional payment from Sanofi was agreed upon, on top of the contractual clauses⁵.

CDMO sales grew 6.8% to €285.8 million

• Sales to Other Clients grew 7.2%, driven notably by increased sales from commercial products. This was partially offset by weaker sales from early-stage projects resulting from Biotech companies funding constraints, the negative impact of the completion of a COVID-19-related commercial project (approximately €(6.8)m on 2023 sales performance), and a high comparison base vs H2 2022 (sales of commercial batches for a US biotech).
• Sales to Sanofi rose 6.3%. Commercial projects progressed, driven notably by the stock replenishment of Pristinamycin, an anti-infective product, in spite of the discontinuation of two late-stage programs at the end of 2022 (approximately €(16) million on 2023 sales performance).
• Number of RFPs received in 2023: 211 incoming RFPs were received in 2023, compared to 230 last year, of which 57% were early-stage projects and 43% were late-stage projects. The average value per offer sent grew 1% on average⁶ in 2023. The weaker average value in H2 was mainly due to a focus on early-stage innovative projects and year-end late-stage offers postponed in Q1 2024.
• Number of CDMO projects: 69 projects were active at the end of December 2023. Throughout the year, 23 new contracts were signed, of which 12 were in the pre-approval or commercial phase, spurred by the increasing demand for peptides and oligonucleotides, complex chemistry RSM or API re-shoring and dual sourcing with European players. 16 projects were stopped, paused, or delayed by customers, including 2 in late-stage with Sanofi, and 12 in early-stage.

Net Sales per type of molecule

• Large molecules decreased by 22.3% to €76.5 million, notably affected by the discontinuation of a CDMO phase 3 project with Sanofi in 2022 and the progressive discontinuation of Buserelin production after its divestment by Sanofi.
• Highly potent molecules were up +17.2% to €96.4 million, mainly driven by the growth of prostaglandins which production resumed in mid-April 2023.
• Biochemistry molecules derived from fermentation increased by 24.2% to €184.1 million. The growth was driven by the increase in vitamin B12 sales, and the stock replenishment of anti-infective products by Sanofi (Pristinamycin).
• Complex chemical synthesis molecules increased by 1.3% to €656.2 million. The positive impact of price adjustments and the increase in volumes of a CDMO commercial product with Sanofi was partially offset by the discontinuation of a phase 3 project with Sanofi in 2022, and of a COVID-19-related project.

Financial performance

Gross Profit

Gross profit was €164.6 million, compared to €176.9 million in 2022. The gross profit margin was down by 190 bps Year-on-Year to 16.2%. This includes the negative impact of decreasing volumes and of energy and raw materials higher prices.

EBITDA and Operating Income

EBITDA was €68.6 million compared to €93.7 million in 2022, including €24.5 million non-recurring, of which:

• €12.3 million costs related to the value creation plan announced in March 2023.
• €11.5 million linked to employee share plan, free share plans, forfeited share expenses and employee contribution⁸.

Core EBITDA amounted to €93.1 million, down 22.4% compared to €120.0 million in 2022. Core EBITDA margin was 9.2%, compared to 12.3% in 2022 negatively impacted by

• a less favorable fixed cost absorption as sales volumes were lower than initially anticipated
• an unfavorable margin mix
• the increase in Opex, of which €3.5 million negative one-off impact related to the Executive Committee's reorganization, or cc (170) bps
  
  

The extra-profit tax in Hungary (€3.4 million, or cc. (35) bps) was partially offset by the €2.5 million provision reversal from the pharma tax accrued in 2022 (+0.3 pts on Core EBITDA).

Impairments⁹

The strategic review triggered

• €(226.4) million impairments on non-current assets on a total of €859.5 million, reflecting the deterioration of future Cash Flow compared to the previous plan and the increase of WACC from 7.1% to 8.3%
  
  

Operating Income

Operating Income was €(234.3) million compared to €(0.8) million in 2022. Depreciation and amortization amounted €76.5 million in 2023, compared to €94.5 million in 2022.

Net Income

Financial income was €(8.5) million, compared with €4.0 million in 2022, negatively impacted by the increasing cost of debt and the lower positive impact of the discounting effects of provisions in 2023. As a reminder, the effect of discounting of provision was positive €8.1 millions in 2022. Income tax was €53.0 million, of which €42.0 million deferred taxes from the revaluation of EUROAPI Hungary assets. The revaluation was triggered by the tax treatment applied by Sanofi in 2023 to the transfer of the Hungarian business to EUROAPI as part of the carve-out in 2021 and the subsequent exit of EUROAPI from Sanofi¹⁰.

Net income was €(189.7) million in 2023. Excluding the impact of the €42.0 million deferred tax asset from the revaluation of EUROAPI Hungary assets and the €(226.4) millions of impairment on non-current assets triggered by the strategic review, the 2023 net income would have been €5.3 million.

Core Free Cash Flow

Core Free Cash Flow was €(82.0) million in 2023 versus €(54.2) million in 2022. 2023 Core Free Cash-Flow was notably impacted by:

• €48.9 million change in trade receivables
• €(40.4) million change in inventories mainly driven by the impact of inflation and sales phasing. Inventory Months On Hand (MOH)¹¹ was 7.6 in 2023 compared to 7.3 in 2022
• €(52.9) million change in payables.
  
  

Capex reached €(129.0) million (12.7% of Net Sales), of which 52% were dedicated to growth projects.

Net Debt Position

The increase in Net Debt position, €(171.0) million compared to a €(25.6) million at the end of December 2022, is driven by the financing of the working capital and part of the Capex. Net Debt to Core EBITDA restated for IFRS 16 was 1.98x, below the RCF covenant of 4.0x.

Ludwig de Mot appointed Chief Executive Officer

Upon the recommendation of the Nominations and Remunerations Committee, EUROAPI’s Board of Directors appointed Ludwig de Mot as Chief Executive Officer, effective on 1^st March 2024. Ludwig joined EUROAPI on January 2^nd, 2024, as EVP and Chief Transformation Officer. With over 30 years of experience, notably in companies undergoing transformation, Ludwig will be instrumental to the success of the FOCUS-27 project and the company’s turnaround.

Serving as interim CEO since October 2023, Viviane Monges will resume her position as Chair of EUROAPI’s Board and actively oversee the deployment of the transformation project. Elizabeth Bastoni, Chair of the Nominations and Compensation Committee, remains independent lead-Director.

FOCUS-27: build on our strengths to refocus on high-value and growing market segments, improve competitiveness, and unlock EUROAPI's sustainable and profitable growth potential

Over the last four months, EUROAPI’s management has carried out a comprehensive analysis of the company’s operational strengths and weaknesses, expected net sales growth, and subsequent financial trajectory.

The review confirmed the long-term growth potential of the company as a leading CDMO and API supplier.

• The merchant API market is expected to deliver a +6% to +8% CAGR between 2024 and 2028, with Tides (+10% CAGR), HP-APIs (+9.0% CAGR), and Biochemistry (+6.5% CAGR) leading the growth
• EUROAPI has one of the broadest CDMO portfolios, offering a diversified range of technology platforms to its customers
• EUROAPI benefits from state-of-the-art innovative technologies to better serve its customers
• Other than Sanofi, EUROAPI has built a broad 500+ customer base, from large Pharma and Biotech to Animal Health, Food, and Cosmetics.

To leverage its potential, the company needs to adapt quickly launching FOCUS-27, a comprehensive 4-year project that builds on EUROAPI’s inner strengths to improve competitiveness and unlock sustainable and profitable growth potential.

The project is built on 4 pillars:

• a streamlined value-added API portfolio,
• a focused CDMO offer leveraging our recognized capabilities and technology platforms,
• a rationalized industrial footprint, and a leaner organization with more efficient ways of working.
  
  

Streamlined value-added portfolio - Optimization of EUROAPI’s API portfolio and focus on highly differentiated profitable products

The strategic review confirmed the potential of several highly differentiated and profitable products, mostly sold to clients other than Sanofi. The commercial strategy will be refocused on these APIs to foster profitable growth, notably:

• Large molecules, including Peptides and Oligonucleotides
• HP APIs, including Prostaglandins, Corticosteroids and Hormones
• Vitamin B12 and derivatives
• Opiates

The decision has been taken to discontinue 13 APIs with low or negative margins, including certain complex small molecules manufactured in Frankfurt and in Brindisi.

These undifferentiated molecules represented 8% of 2023 net sales. To take into account EUROAPI's contractual commitments and regulatory constraints, they will be phased out gradually between 2026 and 2027.

Focused CDMO offer, leveraging our recognized capabilities and technology platforms

Thanks to its unique offer, the CDMO business will remain the main driver for growth and profitability, pending adjustments to enhance the organization's responsiveness and agility.

The portfolio will be progressively shifted towards more customized and high-value CDMO segments, with a focus on complex small molecules and complex tides.

The commercial strategy will be geared towards large biotech and big pharma companies, which accounted for 91% of the RFPs received in 2023. The goal is to increase the average value of the projects and de-risk the pipeline through late-stage projects while strengthening EUROAPIs’ capabilities in HP-APIs, fermentation, and complex tides through value-added and customized offers.

Rationalized industrial footprint, prioritizing high-return CAPEX

The rationalization of the industrial footprint will allow for an increase in capacity utilization, with a targeted average utilization rate of 80% to 85%, in line with industry standards.

It will impact the Frankfurt site, and two workshops could be mothballed to rightsize the small complex chemistry capacities.

In light of the company’s refocused commercial strategy on added-value APIs and the significant decrease in Sanofi’s volumes, the Haverhill and Brindisi sites are considered for divestment. EUROAPI will continue to invest to ensure the required maintenance and compliance CAPEX as well as ongoing CMO activities while working on a potential divestment.

Prioritizing high-return projects, EUROAPI will invest between €350 and 400 million CAPEX between 2024 and 2027, with a focus on strategic growth initiatives, including increased capacities for Peptides and Oligonucleotides, Vitamin B12, and Prostaglandins.

To foster profitable growth, future CAPEX will be focused on:

• Dedicated growth investments will strengthen Elbeuf site biochemistry fermentation capabilities, where a steam generation biomass boiler will be built to reduce CO² emissions to achieve EUROAPI 2030 decarbonation plan
• Vertolaye’s multi-production capabilities will be leveraged to boost Corticosteroids and Hormones sales through innovative processes and accelerate the CDMO roadmap
• The Frankfurt Large Molecules platform to grow the Tides capacities
• In Budapest, EUROAPI will continue to increase its Prostaglandin capacities.

Organizational transformation, and more efficient ways of working¹²

Our organization strives to become more agile and efficient, which includes reducing headcount across all functions. In addition to optimizing its portfolio and rationalizing its industrial footprint, EUROAPI intends to implement a leaner operating model.

All functions, including industrial operations, quality, R&D, and support functions, will contribute to the cost savings initiatives, which could lead to headcount reduction across the organization. The project will be presented to EUROAPI’s social partners, local employee representatives, and European Works Council in the coming days, according to legal and social procedures.

Under the leadership of Ludwig de Mot, several organizational initiatives have been launched:

• The organization of the commercial teams will be redesigned to increase synergies and efficiencies, and support future growth
• The R&D teams will be reprioritized on innovative platforms and late-stage projects to support the CDMO activity
• The transformation of the procurement organization initiated in March 2023 will be accelerated, and a new indirect procurement strategy implemented
• Strengthened E2E processes will allow to improve supply chain efficiency, increase capacity, drive lead-time and inventory reductions.

Revised commercial terms signed with Sanofi

EUROAPI’s initial mid-term perspectives factored in a low-single-digit regular decline in volumes sold to Sanofi, which were expected to be offset by the ramp-up of the sales to Other Clients.

However, the 2024 and 2025 cumulated demand forecasts for API received from Sanofi in early 2024 were significantly below IPO projections. In addition to the volume reduction, higher raw materials and energy prices, which could not be fully reflected in price increases as per the current MSA, weighing on the profitability of our API Solution business.

Acknowledging the need for both parties to adapt their commercial relationship to the current environment, Sanofi and EUROAPI have agreed on a series of revisions to the Manufacturing and Supply Agreement signed in October 2021, including:

• Cancellation of the mutual performance clause¹³. This clause required notably EUROAPI to retrocede to Sanofi a portion of the fixed and variable cost savings realized on APIs sold to Sanofi annually until the end of 2026
• Price increases in 6 selected APIs
• Evolution of the pass-through clause for key raw materials and solvents, with full compensation by Sanofi in case of a