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Evotec SE — M&A Activity 2011
Feb 12, 2011
151_rns_2011-02-12_afad0b78-9903-4cfd-b2b1-6950d97fdb6c.pdf
M&A Activity
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- Recommendation: BUY(BUY) Risk: Medium (Medium)
Price Target: EUR 3.70 (3.70)
Acquisition of Kinaxo
- On 9 February Evotec AG announced the signing of a definitive agreement to acquire Kinaxo Biotechnologies GmbH (Kinaxo), a Munich-based drug discovery alliance company supporting the development of targeted drugs. Initial purchase price of ~EUR 12m consists of a cash consideration of EUR 3m, 2.597.400 shares and an earn-out component of up to EUR 4m in cash dependent on performance milestones. The deal is expected to close in April 2011.
- With EUR 12m initial purchase price Evotec will pay ~4.8x of Kinaxo 2011E sales (or ~6.4x with EUR 4m earn out component), which is comparable to Evotec's estimated EV/Sales of ~5.1x for 2011E. However, Kinaxo anticipates very strong sales growth (~30% yoy in the mid-term), this, coupled with considerable synergy effect (see below for more details), indicates that the deal is not overpriced.
- According to Evotec, despite cash requirements for transaction and integration costs of ~EUR 4m resulting from the acquisition, the company's liquidity should not be affected as management expects to finance the deal from operating cash flow, which from our view point is realistic. Evotec confirms to keep a very strong strategic cash balance also in 2011E with a liquidity of more than EUR 64m.
- From strategic point of view the acquisition of Kinaxo perfectly fits to the business of Evotec, which reinforces the technology base of the latter, optimises the drug discovery process, enhances cost saving potential, strengthens company's position in cancer area, expands customer base and strengthens already existing alliances and adds fast growing business.
- All in all, we positively view the acquisition of Kinaxo and maintain our price target of EUR 3.70/share and BUY recommendation.
| Key data | |||||
|---|---|---|---|---|---|
| Y/E 31.12., EUR m | 2008 | 2009 | 2010E | 2011E | 2012E |
| Revenues | 39.6 | 42.7 | 54.0 | 64.0 | 73.2 |
| Gross profit | 17.6 | 18.4 | 24.1 | 30.4 | 35.9 |
| EBITDA | -68.4 | -38.2 | 2.1 | 3.4 | 5.2 |
| EBIT | -73.2 | -42.3 | 0.5 | 0.9 | 2.4 |
| Net income/loss | -78.3 | -45.5 | 0.1 | 0.9 | 2.4 |
| EPS | -0.82 | -0.43 | 0.00 | 0.01 | 0.02 |
| CPS | -0.43 | -0.20 | -0.04 | 0.03 | 0.04 |
| Gross margin | 44.5% | 43.2% | 44.7% | 47.5% | 49.0% |
| EBITDA margin | -172.7% | -89.6% | 4.0% | 5.3% | 7.1% |
| EBIT margin | -184.8% | -99.1% | 0.9% | 1.4% | 3.3% |
| Source: Evotec AG; CBS Research AG; |
www.cbseydlerresearch.ag
11 February 2011
| Share price (dark) vs. TecDAX | ||||||
|---|---|---|---|---|---|---|
| Source: CBS Research AG, Bloomberg | ||||||
| Change | 2010E | 2011E | 2012E | |||
| Revenue EBIT EPS |
new - - - |
old 54.0 0.5 0.00 |
new 64.0 - - |
old 63.9 0.9 0.01 |
new 72.7 2.4 - |
old 73.2 - - |
| Internet: www.evotec.com Sector: Biotechnology WKN: 566480 ISIN: DE0005664809 Reuters: EVTG.DE Bloomberg: EVT GY |
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| Short company profile Evotec AG is a drug discovery and development company headquartered in Hamburg with operating subsidiaries in India and Singapore. |
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| Share data: | ||||||
| Share price (last closing price, EUR): | 3.25 | |||||
| Shares outstanding (m): | 115.60 375.70 |
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| Market capitalisation (EURm): | 189.80 | |||||
| Enterprise value (EURm): Ø daily trading volume (3 m., no. of shares): 428,375 |
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| Performance data: | ||||||
| High 52 weeks (EUR): | 3.48 | |||||
| Low 52 weeks (EUR): | 1.82 | |||||
| Absolute performance (12 months): | 68.5% | |||||
| Relative performance: (vs. TecDAX) 1 month |
-3.0% | |||||
| 3 months | 19.1% | |||||
| 6 months 12 months |
19.7% 47.2% |
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| Shareholders: | ||||||
| Roland Oetker/ROI | 13.5% | |||||
| TVM V Life Science Ventures | 10.5% | |||||
| Free float | 76.0% | |||||
| Financial calendar: 24 March 2011 FY 2010 results |
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| Authors: Igor Kim (Analyst) Kristina Kardum (Analyst) |
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| Close Brothers Seydler Research AG | ||||||
| Phone: +49 (0) 69-977 84 56 0 | ||||||
| Email: [email protected] |
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| www.cbseydlerresearch.ag |
Please notice the information on the preparation of this document, the disclaimer, the advice regarding possible conflicts of interests, and the mandatory information required by § 34b WpHG (Securities Trading Law) at the end of this document. This financial analysis in accordance with § 34b WpHG is exclusively intended for distribution to individuals that buy or sell financial instruments at their own account or at the account of others in connection with their trading activities, occupation, or employment.
On 9 February Evotec AG announced the signing of a definitive agreement to acquire Kinaxo Biotechnologies GmbH (Kinaxo), a Munich-based drug discovery alliance company supporting the development of targeted drugs.
Initial purchase price of ~EUR 12m consists of a cash consideration of EUR 3m and 2.597.400 shares of which 650.000 shares are held in escrow for 15 months and their release is subject to certain company events and representations. In addition, an earn-out component of up to EUR 4m in cash will become due if certain performance-based milestones are reached. The deal is expected to close in April 2011.
From our point of view the acquisition of Kinaxo perfectly fits to the strategy of Evotec, which reinforces the technology base of the latter, optimising the drug discovery process and provides a number of other positive aspects, which we have briefly summarised below:
- Innovative technology: With the acquisition of Kinaxo, Evotec got access to three developed technologies, with multiple applications in early discovery, clinical support and repositioning: Cellular Target Profiling®, KinAffinity® and PhosphoScout®. A combination of novel technologies has a potential to improve drug development across the entire pharma value chain. Cellular Target Profiling® uncovers the molecular targets of compounds with unknown mode-of-action and reveals possible off-target side effects early in the discovery and development process. KinAffinity® determines the cellular selectivity of kinase inhibitors, which represent the most important class of targeted cancer drugs. PhosphoScout® provides valuable knowledge on drug modes-of-action in vivo and how they respond to drug treatment.
- Stronger position in oncology area: Kinaxo's technology has a particularly high potential in the oncology focused drug discovery alliance business, which is an important core competence of Evotec. According to the Kinaxo's management, 80-85% of their partnerships are established in this therapeutic area. Furthermore, its technology platform has potential in other indications.
- Capital efficiency: The proprietary technology platform of Kinaxo enables Evotec and its partners to take earlier decisions on drug efficacy, safety and response in patients, which in turn should enhance the capital efficiency and increase cost saving potential.
- Strengthening customer base: Kinaxo has numerous service partners such as Johnson and Johnson, Roche, Daichi-Sankyo, Boehringer-Ingelheim, AstraZeneca and others. According to the Kinaxo's management, most of the partnerships were concluded relatively recently (First long term service collaborations with big pharma was concluded in 2009). Thus, aside technology aspects, the acquisition of Kinaxo also allowed Evotec to expand its customer base and strengthen long term collaborations with already existing alliances.
- Expanding scientific network: The acquisition of Kinaxo enables Evotec to further expand its scientific base. Presently Kinaxo employs ~ 25 scientists.
Acquisition of Kinaxo Biotechnologies GmbH
Significant synergy potential
Higher potential in cancer therapeutic area
Enhancing capital efficiency
Strengthening customer base
Expanding of scientific network
- Fast growing business: Evotec anticipates Kinaxo to generate revenue of ~EUR 2.5m in FY 2011E. Overall, the strong revenue growth of ~30% yoy in the medium term is expected.
With EUR 12m initial purchase price Evotec will pay ~4.8x of Kinaxo 2011E sales (or ~6.5x with EUR 4m earn out component), while Evotec's estimated EV/Sales for 2011E is ~5.1x. Thus, given the anticipated strong sales of Kinaxo's (~30% yoy in the mid-term) and considerable synergy effect, the deal does not seem to be overpriced. According to Evotec, despite cash requirements for transaction and integration costs of ~EUR 4m resulting from the acquisition, the company's liquidity should not be affected as management expects to finance the deal from operating cash flow, which from our view point is realistic. Evotec confirms to keep very strong strategic cash balance also in 2011E with a liquidity of more than EUR 64m.
We maintain our price target of EUR 3.70/share and BUY recommendation.
High sales growth potential
PT: EUR 3.70/share, BUY recommendation
Research
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| Roger Peeters | +49 (0)69 -977 8456- 12 | ||
|---|---|---|---|
| Member of the Board | [email protected] | ||
| Martin Decot | +49 (0)69 -977 8456- 13 [email protected] |
Kristina Kardum | +49 (0)69 -977 8456- 21 [email protected] |
| Rabeya Khan | +49 (0)69 -977 8456- 10 [email protected] |
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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 |
|---|---|---|---|
| 30 July 2010 | BUY (Initiating Coverage) | EUR 2.00 | EUR 2.80 |
| 12 August 2010 | BUY (Company Update) | EUR 2.26 | EUR 2.90 |
| 05 October 2010 | BUY (Company Update) | EUR 2.22 | EUR 2.90 |
| 28 October 2010 | BUY (Company Update) | EUR 2.30 | EUR 3.00 |
| 11 November 2010 | BUY (Company Update) | EUR 2.49 | EUR 3.00 |
| 15 December 2010 | BUY (Company Update) | EUR 2.85 | EUR 3.20 |
|---|---|---|---|
| 17 January 2011 | BUY (Company Update) | EUR 3.33 | EUR 3.70 |
| 11 February 2011 | BUY (Company Update) | EUR 3.25 | EUR 3.70 |
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
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