Evotec SE — Investor Presentation 2011

Aug 12, 2011

• Recommendation: BUY(BUY)

Risk: Medium (Medium)

Price Target: EUR 3.60 (3.60)

Excellent 1H/2011 results

• In 1H/11 Evotec managed to achieve a robust top line growth and notably reduce operating expenses in both 2Q and 1H/11. Group revenues increased by 34% to EUR 33.4m (CBSRe: EUR 31.1m) (PY: EUR 25.0m) including EUR 3.9m from the acquisitions of DeveloGen, Kinaxo and Compound Focus. Gross margin of 43.3% in 1H/11 was slightly below the prior year level (45.1%), which is explained by the different revenue mix and currency effects.
• R&D expenses increased to EUR 4.7m (PY: EUR 2.9m; yoy 59%). Despite the acquisitions and significant revenue growth, SG&A costs considerably declined from EUR 7.7m in 1H/10 (31% of sales) to EUR 7.6m (22.7% of sales) in 1H/11. This, coupled with strong growth in the top line drove Evotec's EBIT into the black at EUR 0.9m in 1H/11 (PY: EUR 0.3m). Operating cash flow in 1H/11 has notably improved and totaled EUR 3.6m (PY: -5.1m). Liquidity including cash, cash equivalents and investments including long-term financial assets remained strong at EUR 56.5m at the end of June 2011.
• For the second time in 2011 Evotec raised its revenue guidance for 2011. The new top line guidance for 2011 of ~30% growth to EUR 70 to 72m is realistic, in our view. Evotec also confirmed its 2011 year-end liquidity target of >EUR 55m at constant year-end PY currencies (CBSR estimate for 2011: ~EUR 58m). All other financial targets remain unchanged.
• Aside of its 1H/11 figures Evotec has also announced a new asset deal with EVT 401 in animal health. The company has entered into a worldwide license and collaboration agreement with a top tier animal health company that intends to develop the proprietary Evotec compound EVT 401. Evotec is entitled to receive technology access fees, development and commercial milestone payments, and significant tiered royalties on net sales. Evotec retains all rights to the programme for human therapeutic use. No further financial details were disclosed.
• We leave our price target at EUR 3.60 unchanged, and retain a BUY recommendation.

Key data
Y/E 31.12., EUR m	2008	2009	2010	2011E	2012E	2013E
Revenues	39.6	42.7	55.3	72.1	87.0	98.3
Gross profit	17.6	18.4	24.3	32.9	42.6	50.1
EBITDA	-68.4	-38.2	6.5	9.4	10.5	15.6
EBIT	-73.2	-42.3	1.7	4.3	5.6	10.6
Net income/loss	-78.3	-45.5	3.0	4.0	4.4	8.8
EPS	-0.82	-0.43	0.03	0.03	0.04	0.07
CPS	-0.43	-0.20	0.00	0.08	0.06	0.00
Gross margin	44.5%	43.2%	44.1%	45.7%	49.0%	51.0%
EBITDA margin	-172.7%	-89.6%	11.7%	13.1%	12.1%	15.9%
EBIT margin	-184.8%	-99.1%	3.1%	6.0%	6.5%	10.8%
EV/Sales	4.0	3.7	2.9	2.2	1.8	1.6

Source: Evotec AG; CBS Research AG;

www.cbseydlerresearch.ag

11 August 2011

Share price (dark) vs. TecDAX Source: CBS Research AG, Bloomberg
Change	2011E	2012E	2013E
Revenue 72.1 EBIT EPS WKN: 566480	new old 69.8 4.3 3.5 0.03 0.03 Internet: www.evotec.com Sector: Biotechnology Reuters: EVTG.DE	new old 87.0 84.6 5.6 6.1 0.04 0.03 Bloomberg: EVT GY	new old - 98.3 - 10.6 - 0.07 ISIN: DE0005664809
	Short company profile Evotec is a drug discovery alliance and development partnership company focused on rapidly progressing innovative product approaches with leading pharmaceutical and biotechnology companies.
	Share data: 1.74 Share price (last closing price, EUR): Shares outstanding (m): 118.30 205.25 Market capitalisation (EURm): 158.50 Enterprise value (EURm):
	Ø daily trading volume (3 m., no. of shares): 578,048 Performance data:
	High 52 weeks (EUR): Low 52 weeks (EUR): Absolute performance (12 months):		3.48 1.58 -13.3%
1 month	Relative performance: (vs. TecDAX)		-5.3%
3 months			-18.4%
6 months			-23.4%
12 months			-10.3%
Shareholders:
	Roland Oetker/ROI		14.7%
	TVM V Life Science Ventures		<10%
	76.0% Free float
Financial calendar: 03 November 2011 9M/2011 results
Igor Kim (Analyst) Author
	Close Brothers Seydler Research AG
	Phone: +49 (0) 69-977 84 56 0
Email:		research@cbseydlerresearch.ag
		www.cbseydlerresearch.ag

1H/2011 overview

Evotec released very strong 1H/11 figures which beat our estimates. The company managed to achieve a robust top line growth and notably reduce operating expenses in 2Q/11. Total Group revenues increased by 34% to EUR 33.4m (CBSR est.: EUR 31.1m) (PY: EUR 25.0m) including EUR 3.9 m from the acquisitions of DeveloGen, Kinaxo and Compound Foucs. Gross margin of 43.3% in 1H/11 was slightly below the prior year level (45.1%), which is explained by the different revenue mix and currency effects. R&D expenses increased to EUR 4.7m (PY: EUR 2.9m; yoy 59%), mainly from the inclusion of DeveloGen and Kinaxo R&D expenses and the strategic build up of Evotec's beta cell franchise "CureBeta".

Despite the acquisitions and significant revenue growth, SG&A costs declined both in absolute terms and as a percentage of sales from EUR 7.7m in 1H/10 (31% of sales) to EUR 7.6m (22.7% of sales). This, coupled with strong growth in the top line drove Evotec's EBIT into the black at EUR 0.9m in 1H/11 (PY: EUR 0.3m). Operating cash flow in 1H/11 has notably improved and totaled EUR 3.6m (PY: - 5.1m). Liquidity including cash, cash equivalents and investments including longterm financial assets remained strong at EUR 56.5m at the end of June 2011.

Increased revenue guidance for FY 2011

For the second time in 2011 Evotec raised its revenue guidance for 2011. In 2011, total Group revenues are now expected to grow by ~30%, leading to revenues of EUR 70 to 72m (March: EUR 64 to 66 m; June: EUR 68 to 70m). The revenue guidance is realistic, in our view, given the expected strong organic growth of the company's core business and additional contribution from two acquisitions made in this year; Kinaxo (approx. +EUR 2m in 2011E) and Compound Focus (approx. +EUR 4m in 2011E).

Evotec also confirmed its 2011 year-end liquidity target of >EUR 55m at constant year-end PY currencies (CBSR estimate for 2011: EUR 58.). This target was updated as a result of the Compound Focus acquisition in June 2011 (before: EUR 65 m) as EUR 10.25m of the potential total cash purchase price of EUR 12.5 m is paid in 2011. All other financial targets remain unchanged. Focusing on key programmes, especially in the fields of innovation in metabolic diseases and regenerative medicine, the Company expects R&D expenses to increase to ~EUR 10m from PY levels. On this basis, Evotec's Group operating result before impairment charges, if any, is expected to be profitable and improve over 2010.

Other events: New asset deal with EVT 401 in animal health

Aside from its 1H/11 figures Evotec also announced a new asset deal with EVT 401 in animal health. The company has entered into a world-wide license and collaboration agreement with a top tier animal health company that intends to develop the proprietary Evotec compound EVT 401, a selective, small molecule P2X7 antagonist, in the companion animal market. Evotec is entitled to receive technology access fees, development and commercial milestone payments, and significant tiered royalties on net sales. Evotec retains all rights to the programme for human therapeutic use. No further financial details were disclosed.

Strong figures in 1H/11

Increased guidance

New deal with EVT 401

Appendix

Profit & loss account

IFRS EUR 1,000	2008	2009	2010	2011E	2012E	2013E
Total revenues YoY grow th	39,613 -27.2%	42,683 7.7%	55,262 29.5%	72,065 30.4%	87,012 20.7%	98,328 13.0%
Cost of revenue	-21,977	-24,262	-30,916	-39,140	-44,376	-48,181
as % of sales	-55.5%	-56.8%	-55.9%	-54.3%	-51.0%	-49.0%
Gross profit	17,636	18,421	24,346	32,925	42,636	50,147
as % of sales	44.5%	43.2%	44.1%	45.7%	49.0%	51.0%
Research and development expenses	-42,537	-20,947	-6,116	-10,000	-12,182	-13,766
as % of sales	-107.4%	-49.1%	-11.1%	-13.9%	-14.0%	-14.0%
Selling, general and administrative (S,G&A)	-19,950	-16,695	-15,956	-16,771	-23,493	-24,582
as % of sales	-50.4%	-39.1%	-28.9%	-23.3%	-27.0%	-25.0%
Other operating expenses	-28,359	-23,078	-559	-1,847	-1,327	-1,174
as % of sales	-71.6%	-54.1%	-1.0%	-2.6%	-1.5%	-1.2%
EBITDA	-68,404	-38,234	6,480	9,431	10,529	15,591
as % of sales	-172.7%	-89.6%	11.7%	13.1%	12.1%	15.9%
Depreciation and amortisation	-4,806	-4,065	-4,765	-5,123	-4,895	-4,966
as % of sales	-12.1%	-9.5%	-8.6%	-7.1%	-5.6%	-5.1%
EBIT	-73,210	-42,299	1,715	4,308	5,634	10,625
as % of sales	-184.8%	-99.1%	3.1%	6.0%	6.5%	10.8%
Net financial results	-2,760	-2,520	2,152	948	128	774
EBT (Earnings before income taxes)	-75,970	-44,819	3,867	5,256	5,762	11,399
as % of sales	-191.8%	-105.0%	7.0%	7.3%	6.6%	11.6%
Income taxes	-2,317	-678	-882	-1,209	-1,325	-2,622
as % of EBT	3.0%	1.5%	-22.8%	-23.0%	-23.0%	-23.0%
Net income/loss	-78,287	-45,497	2,985	4,047	4,437	8,777
as % of sales	-197.6%	-106.6%	5.4%	5.6%	5.1%	8.9%
Basic earnings per share (EUR)	-0.82	-0.43	0.03	0.03	0.04	0.07

Source: Evotec; CBS Research

Balance sheet

IFRS EUR 1,000	2008	2009	2010	2011E	2012E	2013E
Assets
Noncurrent assets as % of total equity and liabilities	89,822 49.1%	77,642 53.0%	105,167 54.8%	131,147 64.2%	129,262 61.5%	127,304 57.9%
Property, plant and equipment	18,468	19,162	18,487	22,462	21,883	21,099
Total intangible assets	60,455	45,567	83,594	105,080	103,753	102,579
Other assets	10,899	12,913	3,086	3,077	3,099	3,099
Deferred tax assets	0	0	0	527	527	527
Current assets as % of total equity and liabilities	93,078 50.9%	68,957 47.0%	86,692 45.2%	73,029 35.8%	80,913 38.5%	92,389 42.1%
Cash and cash equivalents	55,064	32,926	21,091	25,297	30,675	39,949
Investments	29,034	25,432	46,303	30,000	30,000	30,000
Accounts receivables due from related parties	0	0	28	11	11	11
Trade accounts receivables	2,531	4,510	11,841	6,600	8,580	10,296
Inventories	2,139	2,425	2,819	3,812	4,237	4,623
Current tax receivables	1,373	347	569	600	700	800
Other current financial assets	951	1,428	1,142	3,400	3,400	3,400
Prepaid expenses and other current assets	1,986	1,889	2,899	3,321	3,321	3,321
Total assets	182,900	146,599	191,859	204,176	210,175	219,692
Shareholders´ equity and liabilities
Shareholders´ equity as % of total equity and liabilities	149,859 81.9%	111,487 76.0%	132,637 69.1%	144,663 70.9%	149,100 70.9%	157,877 71.9%
Share capital	108,839	108,839	115,596	118,316	118,316	118,316
Additional paid-in capital	647,163	648,417	658,888	664,685	664,685	664,685
Accumulated other comprehensive income	-32,762	-27,478	-26,679	-27,217	-27,217	-27,217
Accumulated deficit	-573,381	-618,904	-615,644	-611,497	-606,940	-598,019
Equity attributable ro shareholders of Evotec Minority interests	149,859 0	110,874 613	132,161 476	144,287 376	148,844 256	157,765 112
Current liabilities	21,826	26,445	32,802	33,759	35,321	36,061
as % of total equity and liabilities	11.9%	18.0%	17.1%	16.5%	16.8%	16.4%
Current maturities of long-term loans	2,579	9,087	8,356	8,356	9,500	9,500
Current portion of finance lease obligations	356	229	109	70	189	189
Trade accounts payable	6,371	4,398	6,980	7,500	8,632	9,372
Accounts payable to related parties	820	837	0	0	0	0
Advanced payments received	275	129	1,421	900	1,100	1,100
Provisions	6,859	4,858	6,656	7,000	7,000	7,000
Deferred revenue	1,238	5,483	7,675	7,000	6,000	6,000
Current income tax payable	1,719	244	773	1,000	1,000	1,000
Other current financial liabilities	609	485	225	1,333	1,300	1,300
Other current liabilities	1,000	695	607	600	600	600
Noncurrent liabilities as % of total equity and liabilities	11,215 6.1%	8,667 5.9%	26,420 13.8%	25,754 12.6%	25,754 12.3%	25,754 11.7%
Long-term loans	8,047	3,757	3,500	3,000	3,000	3,000
Long-term finance lease obligations	346	132	32	32	32	32
Deferred tax liabilities	1,463	1,977	6,660	6,538	6,538	6,538
Deferred revenue	580	1,969	3,506	1,000	1,000	1,000
Provisions	779	832	12,722	15,184	15,184	15,184
Total equity and liabilities	182,900	146,599	191,859	204,176	210,175	219,692

Source: Evotec; CBS Research

Cash flow statement

IFRS	EUR 1,000	2008	2009	2010	2011E	2012E	2013E
Net result		-78,287	-45,497	2,985	4,047	4,437	8,777
Depreciation and amortisation of tangible and intangible assets		4,806	4,065	4,765	5,123	4,895	4,966
Impairment of tangible and intangible assets		27,583	18,316	0	0	0	0
Adj. to reconcile net loss to net cash used in operating activities		5,057	4,410	-2,462	552	-128	-774
Changes in assets and liabilities			-1,209	-4,271	732	-2,173	-1,462
Interest paid received		2,116	-29	-299	-552	128	774
Taxes paid		-832	-1,909	-561	0	0	0
Net cash used in operating activities		-41,278	-21,853	157	9,903	7,159	12,281
Net cash provided by investing activities		61,049	-2,077	-9,877	-5,756	-3,010	-3,008
Net cash provided by financing activities		-4,309	1,520	-3,367	569	1,230	0
Decrease/Increase in Cash and Cash equivalents		15,462	-22,410	-12,345	4,716	5,379	9,274
Exchange rate difference		1,611	272	510	0	0	0
Cash and cash equivalents at the beginning
of the year		37,991	55,064	32,926	20,581	25,297	30,675
Cash and cash equivalents at year´s end		55,064	32,926	20,349	25,297	30,675	39,949

Source: Evotec; CBS Research

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CBS and/or its employees or clients may take positions in, and may make purchases and/ or sales as principal or agent in the securities or related financial instruments discussed in this analysis. CBS may provide investment banking, consulting, and/ or other services to and/ or serve as directors of the companies referred to in this analysis. No part of the authors compensation was, is or will be directly or indirectly related to the recommendations or views expressed.

Recommendation System:

Close Brothers Seydler Research AG uses a 3-level absolute share rating system. The ratings pertain to a time horizon of up to 6 months:

BUY: The expected performance of the share price is above +10%. HOLD: The expected performance of the share price is between 0% and +10%. SELL: The expected performance of the share price is below 0%.

Recommendation history over the last 12 months for the company analysed in this report:

Date	Recommendation	Price at change date	Price target
12 August PY	BUY (Company Update)	EUR 2.26	EUR 2.90
05 October PY	BUY (Company Update)	EUR 2.22	EUR 2.90
28 October PY	BUY (Company Update)	EUR 2.30	EUR 3.00
11 November PY	BUY (Company Update)	EUR 2.49	EUR 3.00
15 December PY	BUY (Company Update)	EUR 2.85	EUR 3.20

Close Brothers Sey
Research AG

17 January 2011	BUY (Company Update)	EUR 3.33	EUR 3.70
11 February 2011	BUY (Company Update)	EUR 3.25	EUR 3.70
10 March 2011	BUY (Company Update)	EUR 3.00	EUR 3.70
24 March 2011	BUY (Company Update)	EUR 2.94	EUR 3.70
13 May 2011	BUY (Company Update)	EUR 3.00	EUR 3.70
14 June 2011	BUY (Company Update)	EUR 2.71	EUR 3.60
11 August 2011	BUY (Company Update)	EUR 1.74	EUR 3.60

Risk-scaling System:

Close Brothers Seydler Research AG uses a 3-level risk-scaling system. The ratings pertain to a time horizon of up to 6 months:

LOW: The volatility is expected to be lower than the volatility of the benchmark MEDIUM: The volatility is expected to be equal to the volatility of the benchmark HIGH: The volatility is expected to be higher than the volatility of the benchmark

The following valuation methods are used when valuing companies: Multiplier models (price/earnings, price/cash flow, price/book value, EV/Sales, EV/EBIT, EV/EBITA, EV/EBITDA), peer group comparisons, historical valuation approaches, discounting models (DCF, DDM), break-up value approaches or asset valuation approaches. The valuation models are dependent upon macroeconomic measures such as interest, currencies, raw materials and assumptions concerning the economy. In addition, market moods influence the valuation of companies. The figures taken from the income statement, the cash flow statement and the balance sheet upon which the evaluation of companies is based are estimates referring to given dates and therefore subject to risks. These may change at any time without prior notice.

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