Evotec Major Contract Win

Evotec has signed a €60m contract with the National Institutes of Health (NIH) for the provision of compound management services. This deal confirms that Evotec’s acquisition of Compound Focus from Galapagos was value enhancing, further demonstrating the success of Evotec’s bolt-on acquisition strategy. Roche has started a Phase II study with EVT302 and more significant announcements are due before the end of the year. We have increased our valuation by €30m to €485m.

Evotec To Provide Compound Management Services To NIH
Evotec has signed a contract to manage and operate a small molecule repository for the NIH in the US for up to 10 years. In exchange for these services Evotec could earn up to €60m. This contract is a continuation of the N01MH41001 contract between the NIH and Compound Focus, which Evotec bought in June 2011 from Galapagos. The deal may result in Evotec paying a cash earn-out for the acquisition to Galapagos, but this will not have an impact of Evotec’s income statement.

Clear Validation Of Compound Focus Acquisition
We estimate that the value of the contract to Evotec is €6.8m assuming the company achieves a margin of 25% (WACC: 10%, tax rate 30%). Evotec bought Compound Focus (now Evotec San Francisco) for €10.25m in cash and €2.25m in earn-outs for various milestones. Following the agreement with the US Environmental Protection Agency, the new contract provides strong evidence that this purchase was value accretive, as were the bolt-on acquisitions of Kinaxo and DeveloGen.

EVT302 Started Phase II And More News Due In Q412
Roche has initiated a Phase II trial (n=420) with EVT302 (RG1577) in Alzheimer’s disease, indicating our concerns were misplaced. Evotec still expects to form at least one more major strategic alliance and build more academic partnerships (similar to the CureBeta alliance with Harvard, which resulted in the alliance with Janssen in diabetes) before the end of the year. It should provide further details on the strategy with EVT101/103 programme and other CureX initiatives.

Valuation: DCF Valuation Of €485m
We increase our valuation of Evotec by €30m to €485m, after adjusting our estimates following the better than-expected Q212 results and changes to discount factors due to time elapsing. We have increased our revenue estimate by 0.4% and adjusted EPS by 52% for FY12, because of the tight cost control in H112.

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