Evotec SE: A Value Investor's Look at a Strategic Reset and Its Intrinsic Value

The strategic pivot at Evotec is a classic value investor's test: can a company successfully narrow its focus to build a wider, more durable moat? The evidence suggests the reset is strengthening the economic model, but the core discovery business remains a vulnerable spot. The thesis is that the shift toward high-margin, asset-light partnerships is paying off, yet the underlying market for drug discovery is still soft.

The first sign of a successful reset is cost discipline. The company's Priority Reset is delivering ahead-of-plan savings, with cost optimization now expected to exceed initial targets. This isn't just about cutting expenses; it's about right-sizing the business for a new, more profitable path. The financial results show this discipline in action, with adjusted EBITDA guidance held firm even as top-line revenue expectations were trimmed. This control over the bottom line provides a crucial buffer and supports the long-term margin targets.

More importantly, the revenue mix is shifting in the right direction. The company's high-margin technology license revenues are having a stronger impact than anticipated. This is the hallmark of a moat-building strategy: moving from commodity-like services to selling proprietary platforms and IP. The evolution of partnerships, like the one with Sandoz, validates this approach. A planned transaction to sell a key manufacturing site while retaining technology licensing rights is a textbook move toward an asset-light model, further de-risking the capital structure and focusing on scalable IP.

Yet, the core engine of the business still faces headwinds. The Discovery & Preclinical Development segment, which includes the traditional shared R&D base, continues to see soft demand. Revenues here fell 11% in the first half, a clear sign the cyclical market for early-stage drug discovery remains challenging. This segment's vulnerability is the counterpoint to the strength elsewhere. It's the part of the business that is most exposed to pharma partners pulling back on early investments.

On the flip side, the Just-Evotec Biologics unit is exceeding expectations, with revenues increasing 16%. This growth, driven by a broadened customer base beyond its major partners, shows the power of a focused, technology-led service model. It's the successful execution of the new strategy in practice.

The bottom line is a business in transition. The economic moat is being rebuilt, with cost savings and high-margin licensing providing a stronger foundation. But the durability of this new model depends on the core discovery segment finding its footing. The company's guidance and long-term targets suggest management is confident in the pivot's trajectory, but the soft demand in D&PD is a reminder that the reset is not yet complete. For a value investor, the key question is whether the widening moat in the new segments can fully compensate for the cyclical pressures in the old.

Financial Health and the Path to Sustainable Cash Flow

The financial health of a company is the bedrock of its ability to compound value. For Evotec, the balance sheet presents a clear strength, but the path to sustainable cash flow is still being paved. The company's debt-free status is a critical advantage, especially for a firm undergoing a strategic transformation. This pristine balance sheet provides the necessary financial flexibility to fund its pivot without the burden of interest payments or the pressure of debt covenants, allowing management to focus capital on building its new, higher-margin business model.

Yet, the income statement tells a different story. Evotec remains unprofitable on a GAAP basis, with a trailing price-to-earnings ratio of -7.7. More telling is the cash flow statement, which shows a significant negative cash flow from operations. This gap between reported earnings and actual cash generation is a red flag for a value investor. It suggests that the company is still burning cash to fund its operations and investments, a situation that cannot be sustained indefinitely. The quality of its cash generation is therefore the central challenge.

This reality is reflected in the company's revised guidance. Management has lowered its full-year revenue outlook for 2025 to a range of €760-800 million, down from a previous target of €840-880 million. This downward revision is a direct acknowledgment of the challenging market environment for its core discovery business. While the company maintains its adjusted EBITDA guidance, the revenue cut signals that the top-line growth needed to fund operations and drive future profitability is under pressure.

The bottom line is a company with a fortress balance sheet but a cash burn problem. The debt-free position is a moat in itself, but it does not replace the need for a profitable, cash-generating engine. The path to sustainable cash flow depends entirely on the successful execution of the strategic reset. The company must accelerate the shift toward high-margin licensing and service revenues to close the cash gap. Until that happens, the financial health, while strong on paper, remains precarious in practice. For a long-term investor, the focus must be on whether the new revenue streams can ramp quickly enough to turn the cash flow negative into a positive.

Valuation: Margin of Safety and Long-Term Compounding

The valuation of Evotec presents a classic puzzle for the value investor: a deeply discounted price against a backdrop of significant uncertainty. The numbers suggest a wide margin of safety, but the path to realizing that value is fraught with volatility and depends entirely on the successful execution of a complex turnaround.

On a simple, relative basis, the stock appears cheap. It trades at a Price-to-Sales ratio of 1.5x, a figure that sits well below the industry average and its own historical range. This low multiple, applied to a market cap of roughly €1.1 billion, signals that the market is pricing in a high degree of risk or a prolonged period of stagnation. For a company with a debt-free balance sheet and a clear strategic reset, this discount can be a compelling entry point for a patient investor.

More importantly, a forward-looking model suggests the discount is even deeper. A discounted cash flow analysis estimates a fair value for the stock at €27 per share. With the current price around €3.61, that implies the market is pricing the company at roughly 13% of its estimated intrinsic value. This is the kind of gap that can offer a substantial margin of safety, provided the assumptions about future cash flows are sound. The model likely reflects the long-term compounding potential of the new, asset-light business model, where high-margin licensing and service revenues are expected to drive sustainable growth.

Yet, the stock's recent performance is a stark reminder that value investing is not just about numbers-it's about navigating the gap between price and value. The shares have exhibited extreme volatility, jumping 22.8% over the last 20 days but falling 15.3% over the last 120 days. This choppiness reflects the market's struggle to assess the company's true trajectory. The recent pop may have been driven by optimism around the Sandoz transaction or the broader biotech rally, while the longer-term decline likely captures the persistent softness in the core discovery business. For a value investor, this turbulence is noise. The goal is to identify the business's intrinsic worth and then wait for the market to eventually recognize it.

The bottom line is a setup of high potential reward tempered by high uncertainty. The valuation offers a wide margin of safety on paper, but the stock's volatility underscores the market's skepticism about the strategic reset's success. The long-term compounding story hinges on the company's ability to accelerate growth in its new segments and stabilize the legacy business. Until that trajectory becomes clearer, the stock will likely remain a volatile bet on management's execution. For the disciplined investor, the current price may represent a reasonable entry point, but it demands a long time horizon and a tolerance for continued swings.

Catalysts, Risks, and the Value Investor's Watchlist

The investment thesis for Evotec now hinges on a clear set of near-term milestones that will validate the strategic reset or expose its vulnerabilities. For a value investor, the focus must be on the execution of the long-term 2028 outlook, which requires consistent improvement in the core business and the scaling of new, high-margin partnerships.

The primary catalyst is the company's own 2028 outlook, which management has confirmed. This targets a Group revenue CAGR of 8-12% and an adjusted EBITDA margin above 20% by 2028. Achieving this requires two simultaneous tracks: the D&PD segment must show more than just stabilization, moving toward the first signals of improvement management noted, and the high-margin technology license and JEB service revenues must continue to accelerate. The recent 11.3% revenue growth in JEB and the landmark Sandoz transaction are early proof points, but the market will demand sustained momentum quarter after quarter to believe the long-term compounding story.

A major risk is the continued softness in the early drug discovery market, which remains the core vulnerability. The D&PD segment's 12.3% revenue decline in the first nine months is a stark reminder of this cyclical pressure. If this weakness persists longer than expected, it could delay the revenue mix shift and pressure the company's ability to fund its transformation. The risk is not just about missing near-term targets, but about the timeline for reaching the 2028 margin goal. This is the counterweight to the bullish narrative of a widening moat.

Investors should watch for progress in the partnered asset pipeline, which is a key indicator of future royalty and milestone revenue. Management expects up to four molecules to enter Phase II in the next six to nine months. This is a concrete, near-term milestone that would demonstrate the value of Evotec's scientific platforms and provide a tangible catalyst for the stock. Success here would validate the company's ability to generate high-margin, asset-light returns from its partnerships, directly supporting the 2028 margin target.

The bottom line is a watchlist of execution metrics against a long-term horizon. The value investor's patience will be tested by quarterly volatility, but the real test is whether the company can consistently deliver on the two pillars of its 2028 plan: stabilizing the core and scaling the new. The Sandoz deal provides a powerful near-term cash infusion and focus, but the long-term payoff depends on the disciplined, multi-year execution of the entire strategy.