Evotec SE (EVT-DE): Evotec expands into high-growth biologics segment

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 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

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

goetzpartners securities LinkedIn page

Registered in England No. 04684144.

Managing Directors: Dr. Stephan Goetz, Martin Brunninger and Ulrich Kinzel.

goetzpartners securities Limited - Team Members

Co-Heads / Senior Management - Martin Brunninger and Ulrich Kinzel.

Equity Research Analysts - Brigitte de Lima, Chris Redhead, Martin Piehlmeier and Kieron Banerjee.

Sales - Erland Sternby and Danny de Jong.

Corporate Finance - Ulrich Kinzel, Wolf Dornbusch and Youchen Xin.

Corporate Access and IR - Tanya Tracey and Bettina Ellinghorst.

Compliance & Research Production - Paul W. Dunne.

Click here to see our privacy policy.

GPSL has a formal client relationship with Evotec SE.

GPSL publishes and distributes "Corporate Issuer Sponsored" Research. Our Corporate Issuer Sponsored Research and investor meetings (e.g. NDRs, 1 to 1 meetings) are free to access and attend and is not classified as an inducement in a post-MiFID2 world, this is because the issuer is paying GPSL. GPSL does not offer any execution or market making services. This is a marketing communication as defined by the Financial Conduct Authority ("FCA"). The information herein is considered to be an acceptable minor non-monetary benefit as defined under FCA COBS 2.3A19(5).

If our contractual relationship with clients ceases, then please be advised that we will no longer publish equity research on the specific client and any recipients of our equity research publications should not rely on our forecasts that have previously been published in the last full company research publication. Also, in accordance with the provision of MiFID2 - if clients are not contractually paying GPSL to write and publish equity research, then we will not publish any future equity research publications to the market on the issuer.

In accordance with the General Data Protection Regulation ("GDPR") - if you would like to be removed / unsubscribed from our CRM (also please note that you are free to contact GPSL at any time in the future to have your e-mail subscription amended), please e-mail:
researchproduction@goetzpartners.com

About GPSL: goetzpartners securities Limited is a member of the goetzpartners group, and a leading pan European investment bank and research company. We bring together a wide range of expertise, insights and innovations to advance the interests of our clients around the world. The fast-changing environment brings challenges for businesses and investors. Research innovation, digital transformation and disruptive business ideas reshuffle the corporate world at a relentless pace. Our sector knowledge and our global footprint bring together corporate intelligence and a deep understanding of the industry with a wide network of top decision makers. These collective insights help our clients to stay at the leading edge of change.

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.

This communication (including any attachments) from goetzpartners securities Limited ("GPSL") is confidential and may contain information which is proprietary, privileged or otherwise legally protected against unauthorised use or disclosure. If you receive this communication in error or are not the intended recipient of this communication, please delete and destroy all copies in your possession, notify the sender that you have received this communication, and note that any review or dissemination of, or the taking of any action in reliance on this communication is expressly prohibited. GPSL shall not be liable for the improper or incomplete transmission of the information contained in this communication nor for any delay in its receipt or damage to your system. GPSL does not guarantee that the integrity of this communication has been maintained nor that this communication is free of viruses, interceptions or interference and makes no warranties in relation to these matters. This is not an offer or a solicitation to buy or sell securities or investment products, or an official confirmation. GPSL record electronic and phone communications in accordance with FCA and MiFID2 regulations, they will be monitored for regulatory and training purposes. GPSL is authorised and regulated by the Financial Conduct Authority of the United Kingdom (Firm Reference Number: 225563).

Click on the following link for the GPSL MiFID2 Investor Guidance Notice

GPSL Equity Research publications are available on the following aggregators and via news distribution circuits (For Institutional Use Only): AlphaMetry, AlphaSense, Bloomberg (GOET), Capital IQ, EQS, FACTSET, ResearchFN, Research Tree, RNS Reach, Sentieo and Thomson Reuters.

Please copy the below link and paste it into your browser for the full pdf version of the equity research report:

https://gp.bluematrix.com/sellside/EmailDocViewer?encrypt=53c89098-2270-4a96-8d99-1f72ddd34382&mime=pdf&co=gp&id=paul.dunne@goetzpartners.com&source=libraryView

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.