Evotec Had Strong H1, Foresees Dual Track Growth After Entering Biologics Space
Executive Summary
Evotec upped its full-year guidance after a strong second quarter that saw an important strategic expansion into the biologics space through the acquisition of Just Biotherapeutics Inc.
Building on its strong first-quarter results in May, Evotec SE on 14 August said its performance in the second quarter was also robust, allowing it to upgrade its financial outlook for the full year and predict a further acceleration of its revenue growth now that it has entered the biologics space.
Evotec said it performed well across all business lines during the latest three months, buoyed by milestones and multiple new and extended drug discovery and development agreements with biopharma companies and foundations. The company’s two-pronged business model comprises the Evotec Innovate of co-owned programs and the Evotec Execute services business.
In the first half, group revenues were up 16% at €207m compared with €179m a year earlier. Adjusted Group EBITDA in the period rose 51%, to €58.2m from €38.6m respectively. Evotec said it ended the half year with a strong liquidity position of €342m.
That overall position allowed the German biotech to raise its overall outlook for 2019. Revenues are now expected to increase by some 15% to around €419m and adjusted EBITDA by more than 10% to above €101m, compared with €92.0m in 2018 – both upgrades from around 10% growth previously predicted.
“Evotec is a structural growth story that will continue to deliver solid growth for many years.” - goetzpartners securities
The confidence behind the guidance upgrade also reflected the company’s strategic expansion during the second quarter into the biologics space, through the acquisition of Seattle, WA-based Just Biotherapeutics Inc. (Just.Bio).
Biologics Enter Evotec Mix
In May, Evotec agreed to buy the privately held US firm which develops technologies and services for the manufacture of biologics. (Also see "Deals Shaping The Medical Industry, June 2019" - In Vivo, 12 Jun, 2019.)
Evotec had until now been fully focused on small molecules. The purchase of Just.Bio, which closed on 2 July, expands Evotec’s operations into high-growth biologics segment, giving it a parallel track approach to drug discovery.
Analysts say the addition of Just.Bio is expected to accelerate Evotec's revenue growth, as it gives Evotec a US presence, provides it with more efficient drug development and manufacturing capabilities and services, and enhances Evotec's existing small-molecule offerings, enabling it to grow its pipeline to include biologics in the cancer and inflammation, and CNS, infectious, and metabolic disease areas.
Analysts at Deutsche Bank said in a reaction note on 14 August that “we believe the new guidance is still on the conservative side and would not be surprised to see another guidance raise later this year.“
Other analysts were equally bullish about the company’s prospects.
To Add Momentum
“Evotec is a structural growth story that will continue to deliver solid growth for many years,” goetzpartners securities analysts said in a 14 August reaction note, maintaining their outperform rating on the stock.
Under the terms of the agreement to buy Just.Bio, Evotec will pay $60m upfront and up to $30m in performance-based earn-outs over the coming three years to Just.Bio's blue-chip investor syndicate consisting of ARCH Venture Partners, Merck & Co., Lilly Asia Ventures and the Bill & Melinda Gates Foundation.
The decision by Evotec to integrate Just.Bio reflects the increasing trend in the pharmaceutical industry to focus on large-molecule biologics which are produced in living cells.
That contrasts with small molecules, which hitherto have been the most abundant type of therapeutic drug and that accounted for over half of pharmaceutical sales in 2018, according to goetzpartners securities.
Biologics are harder to copy. Also, regulatory and reimbursement hurdles remain for biosimilars; meaning sales of biologic therapies erode more slowly following patent expiry than those of small molecules.
Evotec said Just.Bio provides end-to-end solutions for the development and manufacturing of biologics through its J.DESIGN technology platform, which aims to accelerate development and provide flexible, high-quality manufacturing process control at the lowest possible cost.
Leaps in the understanding of human biology have been allowing therapies to become increasingly tailored to patient sub-groups.
Goetzpartners securities said the overall consequence is that the market opportunities for individual medicines have been declining, from $800m in 2010 to $465m in 2017.
Companies need to make up the revenue shortfall by developing a higher number of smaller products and improve profitability by shifting fixed to variable costs through outsourcing to make their cost base more flexible, goetzpartners securities. They therefore applauded Evotec’s purchase of Just.Bio.
“Just.Bio addresses this need through its flexible, modular approach to bioreactors and downstream processing, which allows the company to produce even small quantities in a cost-effective manner,” goetzpartners securities said.