Evotec AG (EVT-DE): Partnered asset for NASH moves into Phase II

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goetzpartners securities Limited 
Evotec AG (EVT-DE): Partnered asset for NASH moves into Phase II 
 
25-Jan-2019 / 15:11 GMT/BST 
 
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*Published to the market and investors on 25th January 2019 @ 7.30am (GMT).* 
 
*Evotec AG (EVT-DE): Partnered asset for NASH moves into Phase II* 
*Recommendation: OUTPERFORM* 
*Target Price: EUR25.00* 
*Current Price: EUR20.38 (CoB on 24th January 2019) * 
 
*KEY TAKEAWAY* 
 
Evotec announced that one of its co-owned pipeline assets, Second Genome's 
SGM-1019, discovered based on microbiome science and in development for 
non-alcoholic steatohepatitis ("NASH"), has entered Phase II development, 
triggering a $2m milestone payment to Evotec. NASH represents a large and 
rapidly growing market opportunity and has been an active area of pharma R&D 
and consolidation in the past few years. Similarly, a dysfunctional microbiome 
- the collection of micro-organisms that live in the human body, most of which 
are benign bacteria that reside in the gut - has been implicated in a host of 
diseases. Overall, this is another example of a partnered project within 
Evotec's innovative portfolio that includes >100 projects and whose value 
increases as they progress through development, leading to a growing revenue 
stream. We reiterate and maintain both our OUTPERFORM recommendation and EUR25 
target price. 
 
*NASH is becoming a global epidemic, fuelled by the rise in obesity and 
diabetes* 
 
NASH is an advanced type of non-alcoholic fatty liver disease ("NAFLD"), 
characterised by the accumulation of fat in the liver for no apparent reason, 
causing liver inflammation, cirrhosis and cancer. Fuelled by the increase in 
obesity, it is poised to become the leading cause of end-stage liver disease 
and liver transplantation in the US within the next few years. The prevalence 
is estimated at >10% and there is currently no approved treatment. The race is 
now on to develop the first successful treatment, with frontrunners including 
large companies such as Gilead, AstraZeneca and Allergan. The latter made 
headlines in 2016 when it acquired Tobira for up to $1.7bn - representing a 
1,800% premium - to get hold of two clinical-stage compounds for NASH and as 
such increase its chances of tapping into a market expected to exceed $20bn by 
2025E. 
 
*The microbiome has become an active field of pharmaceutical research* 
 
The human body contains roughly as many microbial as human cells, most of 
which reside in the gut, but also in many other areas of the body. It has 
become clear that most of the microbes in our body supply essential, 
beneficial functions, such as in the breakdown and absorption of food and 
protection against pathogenic bacteria, and further influence functions such 
as sleep, mood, inflammation, skin health and even neurological conditions 
such as Parkinson's disease. It has therefore become an active area of 
research and companies such as Second Genome have been building and developing 
microbiome drug discovery platforms to develop novel therapies targeting a 
range of diseases. 
 
*SGM-1019 one of >100 co-owned pipeline projects driving future value* 
 
While the $2m milestone received from Second Genome may appear modest in 
isolation, it is important to note that it is one of over 100 projects that 
Evotec is working on in collaboration with partners. Collectively, this large 
portfolio increases in value as time goes by and the projects move forward, 
triggering larger success-based milestones and, in the future, potential 
royalties on sales. This is captured in the EVT Innovate business, which 
accounts for nearly 30% of our EUR25 fair value for Evotec. It also reflects 
Evotec's participation in the most innovative fields in drug discovery and the 
role it plays in helping companies develop viable drug candidates that move 
into late-stage clinical trials. 
 
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. 
 
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January 25, 2019 10:11 ET (15:11 GMT)