DJ Evotec AG (EVT-DE): Innovating for the long term
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goetzpartners securities Limited
Evotec AG (EVT-DE): Innovating for the long term
14-Dec-2018 / 15:29 GMT/BST
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*Published to the market and investors on 14th 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 13th 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
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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