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Published to the market and investors on 25^th January 2019 @ 7.30am (GMT).

Evotec AG (EVT-DE): Partnered asset for NASH moves into Phase II
Recommendation: OUTPERFORM
Target Price: EUR25.00
Current Price: EUR20.38 (CoB on 24^th January 2019)

KEY TAKEAWAY

Evotec announced that one of its co-owned pipeline assets, Second Genome's SGM-1019, discovered based on microbiome science and in development for non-alcoholic steatohepatitis ("NASH"), has entered Phase II development, triggering a $2m milestone payment to Evotec. NASH represents a large and rapidly growing market opportunity and has been an active area of pharma R&D and consolidation in the past few years. Similarly, a dysfunctional microbiome - the collection of micro-organisms that live in the human body, most of which are benign bacteria that reside in the gut - has been implicated in a host of diseases. Overall, this is another example of a partnered project within Evotec's innovative portfolio that includes >100 projects and whose value increases as they progress through development, leading to a growing revenue stream. We reiterate and maintain both our OUTPERFORM recommendation and EUR25 target price.

NASH is becoming a global epidemic, fuelled by the rise in obesity and diabetes

NASH is an advanced type of non-alcoholic fatty liver disease ("NAFLD"), characterised by the accumulation of fat in the liver for no apparent reason, causing liver inflammation, cirrhosis and cancer. Fuelled by the increase in obesity, it is poised to become the leading cause of end-stage liver disease and liver transplantation in the US within the next few years. The prevalence is estimated at >10% and there is currently no approved treatment. The race is now on to develop the first successful treatment, with frontrunners including large companies such as Gilead, AstraZeneca and Allergan. The latter made headlines in 2016 when it acquired Tobira for up to $1.7bn - representing a 1,800% premium - to get hold of two clinical-stage compounds for NASH and as such increase its chances of tapping into a market expected to exceed $20bn by 2025E.

The microbiome has become an active field of pharmaceutical research

The human body contains roughly as many microbial as human cells, most of which reside in the gut, but also in many other areas of the body. It has become clear that most of the microbes in our body supply essential, beneficial functions, such as in the breakdown and absorption of food and protection against pathogenic bacteria, and further influence functions such as sleep, mood, inflammation, skin health and even neurological conditions such as Parkinson's disease. It has therefore become an active area of research and companies such as Second Genome have been building and developing microbiome drug discovery platforms to develop novel therapies targeting a range of diseases.

SGM-1019 one of >100 co-owned pipeline projects driving future value

While the $2m milestone received from Second Genome may appear modest in isolation, it is important to note that it is one of over 100 projects that Evotec is working on in collaboration with partners. Collectively, this large portfolio increases in value as time goes by and the projects move forward, triggering larger success-based milestones and, in the future, potential royalties on sales. This is captured in the EVT Innovate business, which accounts for nearly 30% of our EUR25 fair value for Evotec. It also reflects Evotec's participation in the most innovative fields in drug discovery and the role it plays in helping companies develop viable drug candidates that move into late-stage clinical trials.

Kind regards,

Brigitte de Lima | Analyst

goetzpartners Healthcare Research Team | Research Team

goetzpartners securities Limited

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