Evotec AG O.N. (DE:EVTG) operates a hybrid business model and offers a unique risk-reward profile for investors, with steady growth from its EVT Execute business and potential drug development upside from its EVT Innovate arm. We base our investment thesis for Evotec on supportive company-specific and macro trends and forecast healthy cash flows in the future. Our valuation of Evotec is virtually unchanged at €575m.
Favourable macro and company-specific trends
Our investment thesis for Evotec is built on company-specific progress as well as positive industry trends that point towards healthy cash flows in the future. The drug discovery services industry continues to benefit from the need for R&D cost reduction and increasing comfort with outsourcing at pharma and biotech companies.
Service providers such as Evotec offer scalability, efficiency and flexibility with different outsourcing models, which all point towards continuing growth of the drug discovery services market. Due to the high-tech nature of drug discovery, quality of the service is key for long-term relationships and increasing integration level with customers, which also means higher margins.
For example, the total number of Evotec’s alliances increased significantly in 2014 and 2015 reaching 177, of which 67 were new clients. Twenty-one alliances generated more than €1m revenues each for Evotec, indicating a trend of an increasing number of quality customers.
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