EVOTEC AG (FRA:EVT) Evotec SE (EVT-DE): Macro trend drives strong start to the year

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16/05/2019 15:08

goetzpartners securities Limited
Evotec SE (EVT-DE): Macro trend drives strong start to the year

16-May-2019 / 14:08 GMT/BST

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Published to the market and investors on 16th May 2019 @ 6.59am (BST).

Evotec SE (EVT-DE): Macro trend drives strong start to the year
Recommendation: OUTPERFORM
Target Price: EUR28.00
Current Price: EUR23.33 (CoB on 15th May 2019)


Evotec reported strong Q1/2019 results that comfortably exceeded our and consensus estimates on the top and bottom line, driven by solid performance across both business segments (EVT Execute and EVT Innovate). Once again, the results reflect that Evotec is well positioned to benefit from the accelerating macro trend towards external innovation in drug discovery and beyond. On the results call, management stated that "we comfortably confirm our guidance", which may appear conservative in light of Q1 performance. We have made small upward revisions to our FY2019 forecasts, which are marginally above company outlook, and believe that the risk to our numbers is to the upside. We reiterate our OUTPERFORM recommendation and EUR28 target price, which is set at a premium to our fair value of EUR25, as we expect Evotec shares to benefit from positive momentum and scarcity value.

Modest upward revisions to 2019E - 2023E forecasts. Profitable growth to continue

Q1/2019 revenues came in at EUR104m (+31% YoY) and adjusted EBITDA at EUR30m (+114% YoY), 16% and 50% above our forecasts, respectively (CHART 1). As such, Evotec has already achieved more than one-quarter of FY2019 outlook, which is unchanged at c.10% revenue and adjusted EBITDA growth to c.EUR400m and c.EUR101m, respectively. We conservatively raised 2019E revenues by only 2% to EUR411m and adj. EBITDA by 3% to EUR104m (CHART 2) but are confident that Evotec will continue to deliver robust growth for the remainder of the year and is on track to meet or exceed our projections. For 2020E to 2023E, we lifted revenues by 1% and adj. EBITDA by up to 3%. Importantly, despite investing up to EUR40m in R&D this year, the highest level in the company's history, we expect Evotec to remain highly cash generative. We forecast a YE2019E cash balance (cash and cash equivalents plus investments) of EUR205m, up from EUR142m at the end of Q1/2019, representing a net cash position of EUR87m vs. EUR40m at YE2018.

Trend towards virtual biotech model and capital elasticity drive demand

Biotech companies accounted for 46% of Q1/2019 revenues, up from 35% in FY2018 and 26% in FY2017, while the contribution from large pharma declined to 31%, from 34% and 45% in prior years. This mirrors the ongoing trend towards virtual (lean and asset-light) biotech companies, which outsource up to 100% of their R&D work to service providers. The trend is particularly strong in the East Coast of the US, where both the venture capital ("VC") and public market funding environment have been very strong and show no sign of abating following a record-breaking VC funding year in 2018. Another important driver management highlighted during the results call are foundations, which accounted for 6% of Q1/2019 revenues. There are over 400 relevant foundations worldwide that are now increasingly participating in biotech R&D. Since they rarely have the infrastructure needed to carry out drug R&D work, they are highly reliant on fully integrated and sophisticated innovation partners such as Evotec.

Long-term structural growth story

Evotec is a long-term structural growth story. We expect the positive momentum to continue for many years to come, driven by: (1) Increasing outsourcing of R&D across the value chain as pharma and biotech companies look for external innovation partners to shift fixed into variable costs, shorten development times and improve success rates; (2) consolidation in the fragmented contract research organisation ("CRO") industry; (3) substantial upside from Evotec's partnered / co-owned pipeline, the value of which grows as existing projects advance through clinical development and new ones are added. We understand that the average deal has a royalty rate of 8% and approx. EUR200m in total milestones, with induced pluripotent stem cell ("iPSC") deals above these averages; (4) leadership in cutting-edge technology platforms, particularly iPSCs, artificial intelligence ("AI") / machine learning ("ML"), sophisticated pan-omics (e.g. genomics, proteomics, transcriptomics), and targeted protein degradation.

Kind regards,

Brigitte de Lima, PhD, CFA | Research Analyst

goetzpartners Healthcare Research Team | Research Team

goetzpartners securities Limited

The Stanley Building, 7 Pancras Square, London, N1C 4AG, England, UK.

T +44 (0) 203 859 7725 | brigitte.delima@goetzpartners.com / healthcareresearch@goetzpartners.com


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