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Published to the market and investors on 14^th December 2018 @ 8.08am (GMT).

 

Evotec AG (EVT-DE): Innovating for the long term
Recommendation: OUTPERFORM
Target Price: EUR25.00
Current Price: EUR18.46 (CoB on 13^th December 2018)

KEY TAKEAWAY

We have updated our model following 9M/2018 results and reiterate our sum-of-the-part ("SoTP") derived target price ("TP") of EUR25/share (>30% upside). Our 2018E and 2019E estimates are slightly above consensus and we expect Evotec to comfortably exceed 2018 outlook. Evotec is a structural growth story for many years to come, based on four key drivers, in our view: (1) Continued strong outsourcing trend from pharma and biotech in line with the macro trend for external innovation, (2) further consolidation in the highly fragmented CRO industry, (3) substantial upside from its co-owned pipeline, the value of which grows as more projects are added and advance through clinical development, and (4) investments into cutting-edge technologies to remain at the forefront of innovation in drug discovery and beyond. We maintain and reiterate our OUTPERFORM recommendation.

On track to comfortably exceed 2018 financial outlook

Evotec's 2018 financial performance has been very strong. Robust organic growth was boosted by Aptuit, which accounted for two-thirds of the 57% revenue growth in 9M/2018. The Execute business grew by 53% in 9M2018 and the Innovate business by 55%, aided by significant (highly profitable) milestone income, including c.EUR14m from iPSC deals. For FY2018E, we forecast revenue and adjusted EBITDA growth of +41% and 55% YoY, respectively, comfortably above company outlook of >30% and c.30%. To put our estimates into context, we note that: (1) our Q4 revenue forecast is in line with Q2 and Q3; (2) Evotec would only need to generate adjusted EBITDA of c.EUR7m in Q4 (vs. EUR23m on average in each previous 2018 quarter) to achieve its target.

Innovation leadership and co-owned pipeline are key value drivers

While we expect Evotec to continue benefiting from the overall favourable CRO industry dynamics, it is the company's innovation leadership and ability to implement this into the service offering (Execute) and partnership agreements (Innovate) that will drive the most share price upside in the longer term, in our view. This is best exemplified through Evotec's global leadership in induced pluripotent stem cell ("iPSC") technology, which has the potential to revolutionise early-stage drug development, and the use of artificial intelligence ("AI") and machine learning tools in the discovery process. The latter should reduce the costs and duration of drug discovery whilst increasing the probability of success. AI is already being used in drug design and synthetic processes.

SoTP valuation highlights long-term upside from EVT Innovate and iPSC platform

We value Evotec using a SoTP analysis that consists of net present values for EVT Execute, EVT Innovate excl. iPSC, the iPSC platform, net cash at YE2019E, and future M&A deals, which account for approx. one-third of our TP. The inclusion of an M&A component is justified on the basis that Evotec has been able to significantly expand through the successful acquisition of highly complementary businesses, such as Cyprotex, Aptuit, and the former Sanofi R&D sites in Toulouse and Lyon.

Kind regards,

Brigitte de Lima | Analyst

goetzpartners Healthcare Research Team | Research Team

goetzpartners securities Limited

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