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goetzpartners securities Limited
Evotec AG (EVT-DE): A risk-diversified approach
15-March-2018 / 13:00 GMT/BST
Free to access research and investor meetings in a post-MiFID2 world
Evotec AG (EVT-DE): A risk-diversified approach
Recommendation: OUTPERFORM
Target Price: EUR19.40 (increased from EUR13.00)
Current Price: EUR15.50 (cob on 14th March 2018)
KEY TAKEAWAY
The CRO market continues to be highly attractive and only a few players are
positioned as main consolidators. Evotec is well underway to become a main
player in this field. The company recently completed multiple successful
transactions and formed attractive agreements with drug manufacturers. In
addition to our detailed bottom-up analysis for EVT's iPSC platform, we have
modelled a top-down view of the CRO market and EVT's potential market share in
the mid- to long-term. The underlying drivers of the CRO industry and Evotec's
robust business model suggest strong, steady share price momentum for many
years to come. We believe that EVT is set to follow a strong, relatively
de-risked long-term upward trend. In this report, we describe parallels
between EVT's approach and other successful healthcare business models. We
reiterate our OUTPERFORM recommendation and raise our TP to EUR19.40 (from
EUR13), representing c.25% upside potential. Most of this upside potential is
related to the still underappreciated iPSC platform, which we value at EUR994m
(EUR8.7/share).
Pharma productivity dilemma benefits Evotec - Pharma companies used to be
fully vertically integrated from preclinical research to clinical research,
marketing, production, packaging, distribution and tail-end product
management. The consolidation of the drug industry and the poor output on
innovation in the last decade have resulted in a significant slowdown in
earnings growth. Evotec is in a sweet spot to benefit from this productivity
dilemma. Our Pharma outsourcing composite has outperformed both Biotech and
large cap pharma significantly.
Strong outsourcing trend from Big Pharma / Biotech benefits the CRO business
model - Poor historic returns from R&D investment and an increasing complexity
of ever emerging new tools and platforms become more difficult to manage for
drug manufacturers. The increasing pressure to launch more blockbuster
products stems from the dilemma of ever-growing large cap marketing platforms
due to distressed consolidation. This situation makes it harder to deliver
sustainable and long-term earnings expectations from in house products.
Consolidation in a still fragmented CRO market will drive strong earnings
acceleration for Evotec - The increasing complexity of emerging technologies
requires larger players who can bring them onto one platform and optimise for
best possible results. Smaller players can no longer compete on a stand-alone
basis and acquisition multiples in this field are therefore likely to
contract.
Recent agreements and transactions create significant value - EVT combines
latest drug discovery technologies for an optimised and state of the art
approach for modern R&D. It has announced attractive agreements with Sanofi,
Bayer and Celgene, validating the technology from the strongest drug
manufactures, and completed the highly accretive acquisition of Aptuit. We
believe there is ample upside from future agreements. Both a strong
outsourcing trend from Pharma and a highly fragmented CRO market represent
healthy and sustainable earnings drivers.
Pricing power and more product rights will drive value of best-positioned CROs
- The best CROs will become inevitable partners for large and mid Cap
Pharma/Biotech looking to overcome their in-house drought of pipeline assets.
Venture Capital-driven early-stage Biotech will remain an option to overcome
this problem. However, we believe CROs will increasingly benefit from the
early-stage biotech price frenzy with growing contract volumes. Assuming CROs
will come up with successful products, then the established players will enjoy
pricing power with higher royalty rates and larger milestones.
We reiterate our OUTPERFORM recommendation and raise our TP to EUR19.40 (from
EUR13), representing c.25% upside potential.
Click here for full PDF version
Kind regards,
goetzpartners Corporate Research | Research Team
Martin Brunninger | Analyst
goetzpartners Corporate Research
goetzpartners securities Limited
The Stanley Building, 7 Pancras Square, London, N1C 4AG, England, UK.
T +44 (0) 203 859 7725 | healthcareresearch@goetzpartners.com /
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(END) Dow Jones Newswires
March 15, 2018 09:00 ET (13:00 GMT)
