3 Assessment of opportunities and risks in overall presentation

The current risk identification and assessment has been conducted in all areas of BRAIN. This section discusses the risks that have achieved a risk score of at least “medium” at Group level. The Management Board is informed of all identified risks as part of regular reporting.

The assessment of risks was consolidated at Group level and the individual risks were weighted according to their relevance for (adjusted) EBITDA.

BRAIN evaluated a total of 49 risks. Of these, 19 risks are to be categorized as “medium risks” and are aggregated in the risk classes listed below. A total of 30 risks were appraised as “low risk”. No risk was evaluated as a “high risk” or as a “going concern risk” for BRAIN. The risks relate to the BioProducts, BioScience, and BioIncubator operating segments and the holding company.

3.1 Business-related risks

Growth risk, risk from cooperation partners, and planning risk

Given BRAIN’s planned growth and its need to hold resources ready for such growth, risks exist in relation to a lower growth rate, and consequently potential negative effects on the operating result. A risk exists of finding fewer customers and cooperation partners than planned. Macroeconomic trends or relationships with existing customers could also deteriorate and the markets to be served could reduce in volume or attractiveness. This could lead to BRAIN achieving lower growth long-term or to reduced earnings. In addition, the risk exists that costs are higher than budgeted, or that developments require more time. As a consequence, BRAIN’s growth could be delayed and positive operating results might not be achieved until later than planned. A further risk arising from this relates to higher liquidity requirements and the potential need to implement capital measures. Planning risk is summarised under growth risk and is assessed in a comparable manner. The same applies to risks associated with cooperation partners in the context of a deteriorating economic situation.

Compared to the previous year, this risk is estimated to be slightly higher due to the ongoing geopolitical and weak economic situation. However, the overall assessment remains “medium risk” as the threshold for high risk is not exceeded. Supply chain risk decreased significantly in the reporting year, but the uncertain geopolitical situation is continuing to lead to greater uncertainty about the future trend in risk. The inflation rate in Europe is falling, but only compared with a high starting level in the previous year. Core inflation (the inflation rate excluding energy and food price inflation) remains elevated. This indicates a risk of a longer-term effect that will manifest itself in further demands for wage increases. This risk concerns the BioScience and BioProducts operating segments.

Risks from research and development

BRAIN is a technology company, and innovations form an integral part of the BRAIN strategy. The risk always exists that research projects can be delayed (please also refer in this context to the section above entitled “Growth risk”). Milestones or research targets might not be met and biotechnology solutions might not be found, or competitors might be faster to the market. With already more than 150 research projects to date, the company has shown that it commands the expertise to deliver innovations and to tackle technical challenges. Although a predetermined technical path might often prove unfeasible, it has usually been the case in the past that other solutions to achieve the desired result have been developed. The Management Board is convinced that the company will continue to develop solutions in the future, although the risk of diminished innovative capability cannot be ruled out. As far as BRAIN’s proprietary development projects are concerned, the company endeavors to limit risks relating to the research pipeline long-term with its continuous portfolio management process at management level.

The same applies when concluding contracts with collaboration partners. Here, too, before contracts are signed, diversified and cross-functional teams thoroughly evaluate feasibility, cost-effectiveness, and timeframes.

The resultant risk in the Tailor-Made Solutions area would at most involve a default on an outstanding milestone payment, a budget overrun, or the cancellation of an individual project. Such risk is to be largely avoided or minimized through the aforementioned evaluation.

Overall, the risk remained the same as in the previous year. As in the previous year, a “medium risk” exists here that relates especially to the BioScience and BioIncubator segments. This indirectly affects the BioProducts segment to the extent that products developed in the BioScience segment are also to be produced and/or distributed by companies in the BioProducts segment.

Material damage to the BioArchive or research results

The Group’s bioarchives are physically present mainly at BRAIN Biotech AG and at AnalytiCon Discovery GmbH. Physical loss of the archives is minimized through various measures. A redundant setup exists at various locations, as well as a security concept, and staff are trained in archive handling and management.

An insurance concept also exists to cover most of the potential costs to remedy potential losses. The physical measures as well as the insurance concept are reviewed annually and are updated as required in order to reduce the risk to BRAIN even further.

It remains the case that individual research results could also be destroyed by external circumstances. However, these are sufficiently covered by various measures such as emergency power supplies. Various measures to safeguard the BioArchive continued to be implemented during the past financial year. Despite the reduction in risk thanks to the measures that have been implemented, a “medium risk” exists overall, especially in relation to the BioScience segment.

Competition risks

Competition risk for BRAIN consists of a potential price war in markets where BRAIN offers its products. This risk was categorized as a “medium risk”, similar to the previous reporting year, and relates to the BioProducts division. This risk is monitored through ongoing analyses of competitors and the market. In addition, ongoing product innovation and product optimization offer opportunities for mitigation.

3.2 Financial risks

Financial risks are reviewed regularly. The Group has internal guidelines to identify, investigate, and evaluate financial risks at an early stage. Simultaneous comparison with planning is facilitated through monthly and quarterly written reports as well as ongoing communication with the responsible managers. Depending on the extent of divergences in relation to planning, BRAIN managerial functions have sufficient time to implement countermeasures. The Group-wide reporting document for all Group areas has been further developed and improved this year.

Impairment of inventories/assets as well as financing risks at subsidiaries

In light of revenue and earnings growth at some subsidiaries, and the holding available of resources for expansive growth, a risk exists that losses will be incurred if the subsidiaries report lower growth. Under certain circumstances, this could lead to financing problems or financial accounting situations that might necessitate the application of impairment losses to the respective companies’ intangible assets, or the application of impairment losses to tangible assets.

This concerns both operating segments, BioScience and BioProducts. The risk has remained the same as in the previous year and is categorized as a “medium risk”.

Goodwill impairment / valuation of investments

This financial risk relates to both operating segments, BioScience and BioProducts. Given unfavorable future trends, financial risks to be categorized as “medium risk” might entail impairment losses on acquired goodwill and other intangible assets deriving from corporate acquisitions. Compared to the previous year, this risk is unchanged. Further information on this topic is presented in the section entitled “Impairment tests” in the notes to the consolidated financial statements.

Financing risk

At present, the company is increasingly raising debt capital at the holding company level as an alternative to equity financing.

Due to the continued growth of the operating business in the BioProducts and BioScience segments, a need for capital will continue to exist in the next two years to cover the negative operating cash flows. The financing risk consists of competitive disadvantages due to a higher debt-to-equity ratio as well as potentially rising interest rates and requirements for loan collateralization. The company has already taken appropriate measures to secure liquidity for the coming year, such as the provisioning of additional debt capital at holding company level. These measures will enable the company to meet its planned payment obligations beyond the end of the 2023/24 financial year.

This risk affects all three operating segments and the holding company and is still categorized as a “medium risk”. Within this category, however, the risk score has risen.

Financing of option liabilities

As at 30 September 2023, BRAIN holds € 5.4 million of cash. In addition, BRAIN has access to a € 7.0 million loan facility which has only been partially utilized (€ 4.0 million had already been utilized as of 30 September 2023). We assume that the put options for the remaining shares will be exercised by the non-controlling shareholders in the first possible period (1 January to 31 March 2025). This would impact liquidity by around € 3.6 million in the 2024/25 financial year.

As in the previous year, this risk is consequently categorized overall as a “medium risk” and relates to the BioScience segment.

Currency risk

The currency risk consists of a negative exchange rate trend in relation to the currency positions that BRAIN holds. These mainly comprise USD risks. As in the previous year, this risk is assessed as a “medium risk” and relates to the BioProducts segment. The risk is increasingly mitigated by reducing the USD position by shifting to EU suppliers and through natural hedging strategies. The latter is realized through growth in USD revenue.

Interest rate risk

The interest rate risk consists of a rising market interest rate trend that makes it more expensive for BRAIN to procure liquidity. In the reporting year, the ECB significantly raised its reference interest rate, which led to tangibly higher liquidity procurement costs. Overall, the consequences for BRAIN remain manageable, as the existing loans were further reduced and restructured into longer-term liabilities.

As in the previous year, this risk is consequently categorized overall as a “medium risk” and relates to the BioProducts and BioScience segments.

3.3 Legal risks

BRAIN generally endeavors to avoid legal risks and has taken precautions to appraise and measure legal risks. Legal areas entailing one risk relate to litigation in the case of patents and licenses, matters in the regulatory law/capital market area, and relating to general litigation with international firms.

Due to the increasing industrialization and internationalization of BRAIN’s business, the risk of litigation with an international corporate group is also increasing. BRAIN currently appraises the probability that contractual risks will lead to litigation as low. A lawsuit would exert a negative effect on results. Quantification cannot be estimated at present as no significant litigation exists.

Legislative changes

Moreover, the risk always exists that legislation is amended in coming years (such as in fiscal, capital market or other legal regulations). The likelihood that legislation within an area changes is very high. On the other hand, the effects on business results cannot be estimated, although they would affect the entire industry.

This risk of legislative changes can lead to restrictions in business activities as well as higher costs. Such risk is countered by regularly monitoring regulations relevant to BRAIN so that the necessary measures can be initiated in good time in order to minimize direct and indirect consequences as far as possible. This risk continues to be categorized as a “medium risk” and relates to the BioScience, BioProducts, and BioIncubator segments. Within this category, however, the risk score has risen.

Compliance risks

BRAIN is subject to many legal and regulatory requirements in an international context. These requirements are recorded, and relevant training courses are organized within BRAIN. In addition, regular checks are conducted in order to ensure compliance with regulations.

Specific individuals have been appointed for the areas of occupational health and safety as well as data protection. As in the previous year, this risk is categorized as a “medium risk” and affects all three operating segments as well as the holding company.

Risks relating to industrial property rights / intellectual property

BRAIN is a research company whose strategy is based on a competitive intellectual property foundation. A possibility of becoming involved in significant patent litigation exists, but would presumably exert no effects on BRAIN’s results. Existing patent disputes either exert only minor effects on results, or are unlikely to lead to any material damage.

The main risk in this context would be a company claiming freedom to operate. As issued patents become ever more closely intermeshed as intellectual property assets issued internationally, it is becoming increasingly difficult to find all relevant patents in corresponding patent research. This could lead to the risk of patents not being located under certain circumstances, with the potential risk that patents might be infringed unintentionally.

This risk concerns the BioScience, BioIncubator, and BioProducts operating segments. This risk is classified as a “medium risk”, as in the previous year.

3.4 Other risks

IT risks

IT risks exist in relation to the availability of systems and data as well as the integrity and exclusivity of data. Such risks can manifest themselves due to both errors and deliberate actions. The latter are allocated to the area of cyber risks. In addition, cyber crime attacks have increased significantly in recent years.

As digitalization progresses in general as well as of BRAIN, dependence on IT systems is growing. As a consequence, this risk has been raised from a “low risk” to a “medium risk” and affects all three operating segments as well as the holding company.

BRAIN has implemented adequate measures to manage IT risks as good as possible. These measures mainly consist of IT security measures such as firewalls, virus scanners, network protection, data encryption, prompt updating of software used, authentication with multiple factors, and the implementation of regular data backups. As far as data exclusivity is concerned, a data protection officer has been appointed to ensure compliance with the General Data Protection Regulation (GDPR) within BRAIN.

Personnel

Overall, BRAIN employs well-trained personnel who constantly acquire further expertise in the context of the company’s operating activities. Recent years’ trends show that some positions can be filled only at great expense due to a lack of skilled staff, especially scientists, engineers and laboratory staff who already possess experience. In some instances, we note that some competitors have higher salary structures. This leads to the risk that qualified staff might defect to competitors if our financial and non-financial incentives were to prove inadequate. A bonus program for BRAIN Biotech AG staff was already established in the 2015/16 financial year in order to provide adequate incentivization. This program is subject to annual approval by the Management Board.

The risk of loss of key knowledge holders is unchanged compared with the previous year and continues to represent a “medium risk” for BRAIN. This risk concerns all the operating segments, although mainly the BioScience and BioIncubator segments.

Risks in connection with the global supply chain

Supply chains have proved largely stable despite constraints on global logistics, although long delivery times for certain products are already exerted hampered even more dynamic growth in the BioProducts segment due to the tight supply situation. This situation eased significantly in the reporting year. However, it remains as a potential factor given current geopolitical risks.

This risk affects both the BioScience and BioProducts segments. This risk continues to be rated as a “medium risk” overall. Within this category, however, the risk score has decreased.

Inflation and energy supplies

BRAIN depends on a stable supply of gas, oil and electricity to operate its business properly. Gas and electricity, in particular, play a crucial role in R&D operations, the production of enzymes and other products, and the preservation of our bioarchives.

For this reason, sufficient and uninterrupted energy supplies are essential for the BRAIN Biotech Group, and form a basis for our full-year guidance. BRAIN is a supplier to the food and pharmaceutical industries in major sub-segments and is likely to be classified as systemically important in these areas. The volumes of energy required in research operations and other sub-operations lie in the basic supply range, which makes the risk of a shutdown similar to the household sector. In addition to risks arising from supply security, BRAIN also faces cost risks from significant energy price increases and energy price fluctuations. These may not be passed on to customers in full or only with a time delay. This could have a negative impact on the Group’s profitability.

The situation in the energy market stabilized in the reporting year. However, concerns over elevated price volatility remain, and prices could easily rise again if the geopolitical situation were to deteriorate.

Overall, this risk continues to be categorized as a “medium risk” and relates particularly to the BioScience and BioProducts segments.

3.5 Sustainability and ESG

Sustainability forms a central element of our corporate strategy of contributing to greater sustainable growth for our customers and cooperation partners with our bio-based products and services. For this reason, BRAIN also identifies the politically led transformation of the economy towards sustainable economic cycles as a clear opportunity for the company to generate accelerated growth. This accelerated growth prospect applies to all business areas. BRAIN itself also regularly reviews its own business activities in relation to its own sustainability targets.

BRAIN Biotech AG voluntarily published its first sustainability report in 2022. Accordingly, we defined ambitious sustainability targets for 2032 and 2050. With the approval of the Annual General Meeting in 2023, these sustainability targets have also been directly incorporated into the new compensation scheme for the Management Board. On the Management Board, the CFO is directly responsible for the implementation of the ESG strategy. At operational level, an ESG manager has been appointed. The entire Supervisory Board is jointly responsible for the further development and implementation of the ESG strategy. In the 2022/23 financial year, we started with specific projects to implement the ESG strategy. These include several measures such as a photovoltaic project to save energy as well as a number of measures to improve labor productivity, working flexibility, and work ergonomics. We inform our stakeholders about the BRAIN Biotech Group’s current ESG key figures in an annually updated factsheet. BRAIN also publishes an annual declaration as part of the German Sustainability Code (DNK) and the United Nations Sustainability Code (UN Global Compact). In order to fully comply with future sustainability reporting obligations such as CSRD reporting, BRAIN has already invested in a software-assisted solution to systematically record non-financial data. From the company’s perspective, this leads to more opportunities than risks on an overall basis.

Risk reporting on the deployment of financial instruments

At BRAIN, financial instruments¹ are either not deployed, or are deployed only to an extent that is insignificant in order to assess the Group’s financial position and performance, or its prospective development. For further information, please refer to the “Risk management” section in the notes to the consolidated financial statements.