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Evotec — Update 19 November 2015

Evotec — Update 19 November 2015

Evotec

Analyst avatar placeholder

Written by

Evotec

Strong performance drives upgrades

Q315 financial results

Pharma & biotech

20 November 2015

Price

€4.03

Market cap

€534m

$1.07/€

Net cash (€m) at end September 2015

115.9

Shares in issue

132.5m

Free float

79%

Code

EVT

Primary exchange

Frankfurt

Secondary exchange

Xetra

Share price performance

%

1m

3m

12m

Abs

1.2

5.0

31.3

Rel (local)

(7.2)

1.2

12.2

52-week high/low

€4.17

€3.08

Business description

Evotec is a drug discovery business that provides outsourcing solutions to pharmaceutical companies, including Bayer, Boehringer Ingelheim, Janssen and Roche. It has operations in Germany, France, the UK and the US.

Next events

2015 financial results

22 March 2016

Q116 financial results

10 May 2016

Further strategic alliances

2016

Updated near- to mid-term strategy

2016

Analysts

Dr Philippa Gardner

+44 (0)20 3681 2521

Jonas Peciulis

+44 (0)20 3077 5700

Christian Glennie

+44 (0)20 3077 5727

Evotec is a research client of Edison Investment Research Limited

We believe Evotec’s business is well positioned to deliver continued growth, benefiting from the ongoing trend towards outsourcing early-stage drug discovery. A key driver for future growth is via strategic alliances and Evotec has realised a number of both new and expanded agreements this year. We have raised our financial forecasts and, consequently, our valuation to €577m owing to the strong performance year to date, coupled with these collaborations. In 2016 we expect Evotec to provide an update on the future strategy.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/13

85.9

5.1

4.0

0.0

N/A

N/A

12/14

89.5

(0.7)

(2.0)

0.0

N/A

N/A

12/15e

129.6

(1.1)

(2.9)

0.0

N/A

N/A

12/16e

161.1

8.4

5.3

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items.

Strong 9M15 performance aided by Sanofi deal

Evotec’s 9M15 revenues grew 50% to €88.2m, driven by a strong performance in EVT Execute (+52%, the preclinical “services” business), which was boosted by Sanofi revenues. EVT Innovate (the collaborative academic/pharma drug discovery business) grew 34%. The strong performance recently led Evotec to upgrade 2015 revenue guidance to growth >45% (excluding milestones and upfronts). With the performance to date, coupled with a generally strong Q4, we believe this can be surpassed with nearly 60% growth possible, even if Q4 is flat versus Q3.

New and broadened alliances are key for the future

Evotec has successfully executed on a number of new and broadened collaborations. The most significant was the Sanofi transaction at the start of this year, providing additional capacity and enhancing Evotec’s capabilities. Other agreements include in tissue fibrosis with Pfizer, diabetes and immuno-oncology with Sanofi, Alzheimer's disease and Huntington's, broadening and diversifying Evotec's pipeline of opportunities. Evotec currently has a pipeline of >70 product opportunities, including seven in clinical development.

Expect a strategy update in 2016

We continue to believe that in the near to mid-term the key growth drivers for Evotec are EVT Innovate, supported by EVT Execute. During 2016, we expect Evotec to provide an update on the future strategy for these key divisions.

Valuation: DCF valuation of €577m or €4.36/share

Our Evotec valuation has been increased to €577m (from €486m) or €4.36/share, which reflects upgrades to our financial forecasts driving the valuation of the base business. We have also updated for FX, last reported net cash and rolled the valuation forward in time.

Financials

We have made a number of revisions to our financial forecasts given progress in the business, and to incorporate Q2 and Q3. The main changes stem from revisions to income from the Sanofi transaction, providing a boost to our future revenue forecasts, explained in more detail below. We believe Evotec is well positioned to beat or meet the most recent guidance. The main changes to our forecasts are shown in Exhibit 1.

Evotec reported 9M15 revenue growth of 50% with group revenues of €88.2m. This included €93.4m (+52%) from EVT Execute (including €19.5m of intersegment revenues) and €14.3 (+34%) from EVT Innovate. 9M revenues from the Sanofi transaction were €23.8m, which was effective from April 2015; Q315 Sanofi revenues were €12.3m. We now anticipate a similar level of income from Sanofi in the coming quarters, providing a boost to our revenue forecasts (we previously anticipated €28.5m of Sanofi-related revenue in 2015 and €32m in 2016, implying €8m/quarter).

Evotec recently raised revenue guidance, now targeting >45% underlying revenue growth (which excludes milestones, upfront and licences). This implies 2015 underlying revenues >€106.4m. With 9M15 underlying revenues of €83.6m and Q4 generally the strongest quarter each year, we believe this is easily achievable, requiring Q415 underlying revenues of only €22.8m; this would represent a sequential decline compared to €32.9m in Q315. Even if underlying revenues in Q415 are in line with Q315, which seems unlikely, this would suggest €116.5m is possible. We forecast 2015 underlying revenues of €120.0m (+63% growth), implying Q415 underlying revenue of €36.4m.

Milestones, upfront and licences are €4.6m year to date, with no milestone revenues reported in Q315. Evotec does anticipate milestone income in Q415 and we forecast €9.6m for 2015.

We have maintained our 2015 gross margin (31%), but do anticipate an improvement in 2016 (to 34% from 32%) largely with the upgrades to revenues from Sanofi, which we believe are higher margin than the EVT Execute business, where these are incorporated. Our R&D forecasts are largely unchanged in 2015 (€18.2m) and are in line with maintained guidance (€15-20m). SG&A has been increased to reflect the 9M15 trends.

Reported operating profit has been boosted by a one-off €18.5m impact recorded in Q215 from the Sanofi transaction, which we classify as an exceptional item. This drives a swing to profits this year, although our normalised profits are largely unchanged, with the increase to revenues largely offset by an increase to SG&A spend.

Exhibit 1: Summary of the main changes to our Evotec financial forecasts

€m

2014

2015e

2016e

Reported

Old

New

Old

New

Underlying revenues*

73.5

112.8

120.0

123.7

145.7

o/w Sanofi

0.0

28.5

36.2

32.0

49.3

Milestones, upfronts and licences

16.0

13.0

9.6

16.3

15.4

Group revenues

89.5

125.8

129.6

139.9

161.1

CoGS

(60.1)

(86.7)

(89.9)

(95.0)

(105.8)

Gross profit

29.4

39.1

39.7

44.9

55.2

Gross margin

33%

31%

31%

32%

34%

R&D

(12.4)

(18.5)

(18.2)

(17.4)

(19.3)

SG&A

(18.0)

(22.7)

(25.4)

(23.7)

(26.8)

Operating profit (reported)

(6.4)

(3.7)

13.9

3.7

6.0

Operating profit (normalised)

(1.9)

(1.4)

(1.5)

5.8

9.2

Net income (reported)

(7.0)

(3.3)

11.7

1.3

3.8

Source: Edison Investment Research; Evotec accounts. Note: *Underlying revenues exclude milestones, upfront and licences.

Evotec is already ahead of guidance for liquidity (cash and investments) “well in excess of €100m”, with end-Q315 liquidity of €138.8m. Together with debt of €22.9m, this implies net cash of €115.9m.

Valuation

Our Evotec valuation has been increased to €577m (from €486m) or €4.36/share, which includes upgrades from our financial forecasts driving the valuation of the base business. Based on comments on the Q315 conference call where management expects Capex to return to more normal levels of €7-8m pa from 2016 (compared to around €10m in 2015 owing to a number of one-off items, including equipment upgrades in Toulouse and costs related to both the Princeton and Gottingen facilities), we have reduced our Capex forecasts to c €8m from 2016.

In addition, our valuation has been updated to reflect slight strengthening of the US dollar (to $1.07/€ from $1.11/€), adjustments to the discount factors due to the progression of time and an updated number of shares. We have now incorporated valuation of all of the key pipeline assets (which includes all the clinical-stage programmes but now completely excludes EVT302, which missed the primary endpoint in an Alzheimer’s disease trial and acquisition of rights are under evaluation), essentially into a “platform valuation”. The valuation has also been updated to reflect last reported net cash. Our updated valuation is shown in Exhibit 2.

Exhibit 2: Evotec summary of risk-adjusted DCF valuation

Value (€m)

Value per share (€)

Notes

Drug alliance business

385.0

2.91

Three-stage DCF valuation, terminal growth rate from 2025: 2.5%; includes impact of Sanofi deal.

Other key assets (includes EVT201, Somatoprim, EVT100, EVT401, EVT770, undisclosed clinical-stage oncology assets)

75.9

0.57

EVT201: expected launch: 2018; peak sales: $100m; likelihood of success: 30%; royalties: 5%.

Somatoprim: expected launch: 2019; peak sales: $295m; likelihood of success: 30%; royalties: 5%.

EVT401: expected launch: 2018; peak sales: $200m; likelihood of success: 30%; royalties: 5%.

EVT770: estimated clinical milestones risk-adjusted by industry standards.

Two undisclosed assets: expected launch: 2020; peak sales per product: $750m; likelihood of success: 10%; royalties: 5%.

Net cash

115.9

0.88

Net cash position at end Q315.

Total

576.8

4.36

Source: Edison Investment Research. Note: For drug discovery business, WACC = 10%; for product valuations, WACC = 12.5%.

Exhibit 3: Financial summary

€'000s

2012

2013

2014

2015e

2016e

2017e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

87,265

85,938

89,496

129,581

161,057

182,124

Cost of Sales

(56,242)

(54,715)

(60,118)

(89,903)

(105,843)

(116,543)

Gross Profit

31,023

31,223

29,378

39,678

55,213

65,581

EBITDA

 

 

9,119

13,335

4,132

7,191

18,398

24,878

Operating Profit (before GW and except.)

3,071

7,392

(1,942)

(1,516)

9,174

15,798

Intangible Amortisation

(2,768)

(3,222)

(2,462)

(3,093)

(3,176)

(2,960)

Other

(3,311)

2,430

(926)

2,448

105

105

Exceptionals

(3,505)

(25,521)

(1,977)

18,476

0

0

Operating Profit

(3,202)

(21,351)

(6,381)

13,867

5,998

12,837

Net Interest

(1,204)

(1,609)

(1,152)

(994)

(774)

(142)

Other

(608)

(688)

2,374

1,416

0

0

Profit Before Tax (norm)

 

 

1,259

5,095

(720)

(1,094)

8,400

15,656

Profit Before Tax (FRS 3)

 

 

(5,014)

(23,648)

(5,159)

14,289

5,224

12,695

Tax

(793)

(299)

(1,858)

(2,747)

(1,450)

(3,555)

Deferred tax

8,285

(1,486)

39

167

0

0

Profit After Tax (norm)

466

4,796

(2,578)

(3,842)

6,950

12,101

Profit After Tax (FRS 3)

2,478

(25,433)

(6,978)

11,709

3,774

9,141

Average Number of Shares Outstanding (m)

117.3

121.2

131.3

131.5

131.5

131.5

EPS - normalised (c)

 

 

0.4

4.0

(2.0)

(2.9)

5.3

9.2

EPS - FRS 3 (c)

 

 

2.1

(21.0)

(5.3)

8.9

2.9

6.9

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

35.6

36.3

32.8

30.6

34.3

36.0

EBITDA Margin (%)

10.4

15.5

4.6

5.5

11.4

13.7

Operating Margin (before GW and except.) (%)

3.5

8.6

-2.2

-1.2

5.7

8.7

BALANCE SHEET

Fixed Assets

 

 

137,323

104,854

99,300

112,890

108,543

104,698

Intangible Assets

105,608

79,962

75,025

75,310

72,134

69,174

Tangible Assets

27,181

24,239

24,045

37,492

36,321

35,436

Other

4,534

653

230

88

88

88

Current Assets

 

 

88,104

122,526

125,300

157,340

168,569

187,354

Stocks

2,445

2,358

3,111

4,434

5,220

5,747

Debtors

15,053

17,777

25,259

23,076

28,681

32,433

Cash

64,159

96,143

88,822

118,552

123,390

137,896

Other

6,447

6,248

8,108

11,278

11,278

11,278

Current Liabilities

 

 

(33,882)

(38,953)

(33,068)

(47,548)

(49,339)

(53,794)

Creditors

(20,659)

(21,731)

(19,705)

(33,517)

(35,308)

(39,763)

Short term borrowings

(13,223)

(17,222)

(13,363)

(14,031)

(14,031)

(14,031)

Long Term Liabilities

 

 

(38,998)

(29,460)

(33,149)

(44,134)

(44,951)

(45,796)

Long term borrowings

(4,178)

0

(8,186)

(8,900)

(8,900)

(8,900)

Other long term liabilities

(34,820)

(29,460)

(24,963)

(35,234)

(36,051)

(36,896)

Net Assets

 

 

152,547

158,967

158,383

178,548

182,822

192,462

CASH FLOW

Operating Cash Flow

 

 

12,175

7,084

(3,701)

1,658

15,240

23,608

Net Interest

111

(237)

41

(170)

(774)

(142)

Tax

(329)

(190)

(137)

(519)

(1,576)

(765)

Capex

(10,129)

(4,607)

(5,282)

(10,087)

(8,053)

(8,196)

Acquisitions/disposals

(3,000)

(1,150)

(2,436)

37,274

0

0

Financing

701

32,398

658

810

0

0

Dividends

0

0

0

0

0

0

Other

0

(159)

(1,813)

(551)

0

0

Net Cash Flow

(471)

33,139

(12,670)

28,414

4,837

14,506

Opening net debt/(cash)

 

 

(46,895)

(46,758)

(78,921)

(67,273)

(95,621)

(100,459)

HP finance leases initiated

0

0

0

0

0

0

Exchange rate movements

(953)

501

(792)

696

0

0

Other

1287

(1477)

1814

(762)

0

0

Closing net debt/(cash)

 

 

(46,758)

(78,921)

(67,273)

(95,621)

(100,459)

(114,965)

Source: Edison Investment Research, Evotec accounts

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Biotie Therapies — Update 19 November 2015

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