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Evotec AG (EVT-DE): H1/2018 results reflect strong momentum
Recommendation: OUTPERFORM
Target Price: Under Review (from EUR19.40)
Current Price: EUR19.20 (cob on 9^th August 2018)

KEY TAKEAWAY

Evotec reported robust H1/2018 financial results including 67% revenue growth to EUR173.8m, driven by continued growth of the underlying business, the fully integrated Aptuit business, and significant milestone and other income from collaborations. Key updates provided during the call include: (1) Evotec's hybrid business model continues to pay off, with the company now strongly positioned to chase larger and more ambitious projects; (2) the integration of Aptuit remains on track, having significantly expanded Evotec's value proposition to industry customers; (3) the Innovate business continues to gain momentum, reflected in additional partnerships and growing revenues; and (4) management provided additional granularity on the strategy for the infectious diseases ("ID") unit recently acquired from Sanofi. We maintain and reiterate our OUTPERFORM recommendation. Our TP of EUR19.40 is now Under Review given the strong performance of Evotec shares over the last few months.

Critical size achieved, allowing Evotec to chase larger, more ambitious projects

Both the Execute (outsourced discovery services) and Innovate (partnered, de-risked pipeline) businesses demonstrated robust growth. The synergies resulting from the shared technology platforms have led to Evotec building up critical mass and increasingly allow the company to chase larger, more ambitious initiatives and collaborations that go beyond single projects, spanning portfolios and being more strategic in nature. This is a strong differentiation factor compared to traditional CROs and allows Evotec to move towards premium pricing for its services.

Integration of Aptuit on track; increased value proposition to customers

Aptuit added EUR53.6m in revenue in H1/2018 and contributed significantly to adjusted EBITDA of EUR38.6m (c.22% margin). In addition to expanding Evotec's service offering from preclinical development candidate ("PDC") to investigational new drug ("IND") and beyond and providing multiple cross-selling opportunities, the more integrated service offering also increases Evotec's value proposition to biotech and pharma customers. Having all services under one roof allows for the seamless transition between stages in early drug development, resulting in shorter timelines and lower costs and thus increased R&D efficiencies.

Innovate business continues to gain momentum

The strength of Evotec's Innovate business lies in its breadth. Since the beginning of the year, Evotec expanded the number of its co-owned pipeline projects from 80 to c.100, which has further enhanced the portfolio effect. This means that the future potential can be modelled using standard drug development statistics, albeit with higher probabilities of success, based on Evotec using state-of-the-art technologies to de-risk projects early. All the larger milestones related to these projects are on track and include two key milestones already received from Celgene ($6m) and Sanofi (EUR3m) related to the iPSC collaborations in neurodegeneration and diabetes, respectively. We understand that discussions with industry partners are underway and would expect to see additional partnerships in the coming 12 months.

Additional granularity on the strategy for infectious diseases

The recent acquisition of Sanofi's ID unit in Lyon (France) is effective as of 1 July 2018 and the upfront payment of EUR60m, amortised over the coming five years, has therefore been received. Management now anticipates higher R&D expenses of EUR35m - EUR45m in 2018 vs. EUR20m - EUR30m previously as a result of the new unit, which are however fully reimbursed by Sanofi for the coming five years via other operating income. In light of the commercial challenges specific to infectious disease products, Evotec intends to use a unique strategy for its ID projects that might include developing drug candidates all the way to human proof-of-concept in small trials with an efficacy read-out to increase the value proposition for potential future industry partners. Importantly, there are currently multiple public funding initiatives specifically dedicated to ID projects to incentivise industry to conduct R&D in the space and that Evotec should be able to benefit from, thus reducing its own financial investments.

Kind regards,

Brigitte de Lima, PhD, CFA | 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 | healthcareresearch@goetzpartners.com / brigitte.delima@goetzpartners.com

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