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Published to the market and investors on 22^nd May 2019 @ 1.36pm (BST).

Evotec SE (EVT-DE): Evotec expands into high-growth biologics segment
Recommendation: OUTPERFORM
Target Price: EUR 28.00
Current Price: EUR 23.44 (CoB on 21^st May 2019)

KEY TAKEAWAY

Evotec announced that it has signed a definite agreement to acquire Seattle-based Just Biotherapeutics ("Just.Bio") for up to $90m (c.EUR81m) in cash. The acquisition is expected to close in Q2/2019E and accelerate Evotec's revenue growth. Just.Bio is a technology company focused on the design, development and manufacturing of biologics with speed, flexibility and cost-effectiveness at its heart. Despite its short existence (founded in 2014/2015), Just.Bio has already grown to approx. 90 employees and generated revenues of c.$20m in 2018, reflecting its attractive offering and ability to win business, based on three in-house technology platforms. Key benefits from this deal include: (1) Entry into the large and rapidly growing biologics segment with a revenue-generating business, (2) strong cultural and technological fit, and (3) ability to expand co-owned pipeline with biologics in the longer term. We maintain and reiterate both our OUTPERFORM recommendation and EUR28 target price.

Biologics are a large, high-growth therapeutic segment

Evotec is currently fully focused on small molecules, the most abundant type of therapeutic drug and that accounted for over half of pharmaceutical sales in 2018. That said, the pharmaceutical industry has been increasingly focusing on biologics (large molecules that cannot be made through chemical synthesis and are therefore produced in living cells), mainly owing to their higher target specificity and hence (often) more benign side effect profile. Biologics are also harder to copy and both regulatory and reimbursement hurdles remain for biosimilars; hence, sales erode more slowly following patent expiry than those of small molecules. FDA approvals of biologics have risen to 17 in 2018 from 7 in 2017, there are currently >5,000 biologics in the pipeline, and sales are expected to grow to c.$500m in 2025E from $221m in 2018.

Proprietary platform focused on flexibility, speed, and cost-effectiveness

Just.Bio provides end-to-end solutions for the development and manufacturing of biologics through its J.DESIGN technology platform, which aims to accelerate development and provide flexible, high-quality manufacturing process control at the lowest possible cost. This is achieved through three technologies: (1) J.MD for optimal molecular design, leveraging the Abacus machine learning ("ML") tool that focuses on high-yield manufacturing and stability; (2) JP3 to optimise the manufacturing process; and (3) J.POD, which uses disposable technologies and intensified processes for the flexible, modular and cost-effective manufacturing of clinical and commercial-stage biologics.

Flexibility is key in an era of increasingly personalised medicine

Leaps in the understanding of human biology have been allowing therapies to become increasingly tailored to patient sub-groups. There are also a growing number of drugs for rare diseases. The overall consequence is that the market opportunities for individual medicines have been declining (from $800m in 2010 to $465m in 2017). Companies need to make up the revenue shortfall by developing a higher number of smaller products, and improve profitability by shifting fixed to variable costs through outsourcing to flexibilise their cost base. Just.Bio addresses this need through its flexible, modular approach to bioreactors and downstream processing, which allows the company to produce even small quantities in a cost-effective manner.

Maintain OUTPERFORM. Upside to forecasts and valuation likely

Under the terms of the agreement, Evotec will pay $60m (c.EUR54m) upfront and up to $30m in performance-based earn-outs over the coming three years to Just.Bio's blue-chip investor syndicate consisting of ARCH Venture Partners, Merck & Co., Lilly Asia Ventures and the Bill & Melinda Gates Foundation. Management intends to provide further details and a potential update to guidance at the H1/2019 results on 14 August. We intend to update our forecasts in due course and remain confident that this deal will further enhance Evotec's positioning and accelerate its growth.

Kind regards,

Brigitte de Lima, PhD, CFA | Research Analyst

goetzpartners Healthcare Research Team | Research Team

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