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Published to the market and investors on 8^th April 2019 @ 8.10am (BST).

Evotec SE (EVT-DE): Raising TP to EUR28 on positive momentum
Recommendation: OUTPERFORM
Target Price: EUR28.00 (increased from EUR25.00)
Current Price: 25.23 (CoB on 5th April 2019)

KEY TAKEAWAY

Following strong FY2018 financial results which exceeded our and consensus estimates, our revenue and adjusted EBITDA forecasts are broadly unchanged, and we raise our target price ("TP") to EUR28 per share (from EUR25). Evotec is a structural growth story and we expect the positive momentum to continue for many years to come, driven by the following factors: (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 co-owned pipeline, the value of which grows as existing projects advance through clinical development and new ones are added; (4) leadership in cutting-edge technology platforms, particularly induced pluripotent stem cells ("iPSC"), artificial intelligence ("AI") / machine learning ("ML"), sophisticated pan-omics (e.g. genomics, proteomics, transcriptomics), and targeted protein degradation.

Robust FY2018 fuelled by strong biotech funding environment and Aptuit

Evotec reported FY2018 revenues of EUR375m, +42% YoY, including EUR118m from the acquired Aptuit business. Excluding revenues from recharges according to the newly adopted IFRS15, revenues were EUR364m, in line with our estimate of EUR363m and cons. estimate of EUR365m. Adjusted EBITDA was EUR95m, +67% YoY, well above Evotec's outlook of >45% growth thus beating our and consensus estimates of EUR90m and EUR87m, respectively, due largely to lower net other operating expenses. The company benefited from a tax credit of EUR12m vs. our expectation of a EUR6m payment, which resulted in net income of EUR85m well above our EUR63m forecast. Both EVT Execute and EVT Innovate recorded strong performances that were fully in line with our expectations. A key driver was strong demand from biotech companies, which benefited from an exceptional funding environment both from venture capital and public market investors. More and more start-ups are being set up as virtual companies that have a handful of full-time employees and outsource virtually 100% of their drug discovery and development work to CROs.

2019E - 2023E revenue and adjusted EBITDA forecasts broadly unchanged

In light of 2018 results and Evotec's financial outlook for 2019, which foresees group revenue and adjusted EBITDA growth of c.10%, we have trimmed our respective forecasts by up to 2%. We project FY2019E revenues of EUR405m (+11% YoY) and adjusted EBITDA of EUR101m (+10% YoY on a comparable basis). We further forecast total R&D expenses as reported of EUR62m, but note that more than half are related to the infectious disease business in Lyon (France) acquired last year and which will be fully reimbursed by Sanofi. Evotec ended FY2018 with a liquidity position (cash plus investments) of EUR149m. We expect the company to end FY2019 at a similar level given anticipated investments into R&D, capex and debt repayments.

Share expected to trade at a premium to fair value on momentum and scarcity

Our fair value remains unchanged at EUR25 per share, but we increase our TP to EUR28 per share (from EUR25), based on our expectation that Evotec shares should continue to benefit from strong momentum and scarcity value. Evotec has a unique business model that combines a profitable and steadily growing CRO services business with a highly innovative therapeutics pipeline that is co-owned and funded by Evotec's industry partners. To our knowledge, Evotec is the only large cap with this business model, as key CRO competitors (e.g. Charles River Laboratories) only provide drug discovery services while biotech companies with technology platforms usually only enter licensing deals. We maintain our OUTPERFORM recommendation.

Kind regards,

Brigitte de Lima | Analyst

goetzpartners Healthcare Research Team | Research Team

goetzpartners securities Limited

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