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

goetzpartners securities Limited 
Evotec SE (EVT-DE): Macro trend drives strong start to the year 
 
16-May-2019 / 14:08 GMT/BST 
 
*Free to access research and investor meetings in a post-MiFID2 world.* 
 
*This research report is intended for use only by persons who qualify as 
professional investors or eligible counterparties (institutional investors) in 
the applicable jurisdiction, and not by any private individuals or other 
persons who qualify as retail clients.* 
 
*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) * 
 
*KEY TAKEAWAY* 
 
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 
 
www.goetzpartnerssecurities.com [1] 
 
goetzpartners securities LinkedIn page [2] 
 
Registered in England No. 04684144. 
 
Managing Directors: Dr. Stephan Goetz, Martin Brunninger and Ulrich Kinzel. 
 
*goetzpartners securities Limited - Team Members* 
 
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