Evotec on the brink of acquisition: At what cost for the biotech industry?

It’s fair to say Evotec has been part of the European biotech landscape for quite some time. Indeed, it was founded in 1993 in Hamburg, Germany, and stands out as a rare breed: part service provider, part innovator. As a contract research organization (CRO), it collaborates with some of the world’s largest pharmaceutical companies to accelerate drug discovery, but what sets Evotec apart is its second identity – an asset developer building co-owned pipelines of therapeutic candidates alongside partners. This dual model gives Evotec both the stability of service revenues and the high-risk, high-reward potential of developing its own medicines. But lately, it seems Evotec could be the target of an acquisition.

2024 hasn’t been kind to Evotec. Financial struggles have plagued the company, leading to layoffs and the closure of its gene therapy operations. Now, industry players seem poised to capitalize on this rough patch. Triton Partners, a private equity firm, recently acquired nearly 10% of Evotec, while Halozyme Therapeutics has made an unsolicited $2,1 billion (€2 billion) acquisition offer. For a company that once seemed set to remain independent, the prospect of a sale now feels increasingly likely.

As Evotec faces this crossroads, its potential acquisition raises big questions. What does this mean for the European biotech industry, and what might the future hold for one of its most versatile players?

2024: A tough year for Evotec

In August 2024, Evotec shared a financial and strategy update titled: “Challenging year; priority reset for sustainable profitable growth gaining momentum, building on core strengths.” The year was challenging indeed, with the revenues for shared research and development (R&D) down 7% year-on-year. 

The press release mentions a challenging market environment and high fixed cost base as an explanation for the weaker profitability. Evotec’s recent expansions, such as its J.POD biologics manufacturing facility in Toulouse, added new fixed expenses. This investment was made in anticipation of higher demand, but with the biotech market slowdown, revenues didn’t grow as expected to offset these costs. 

These challenges show in the company’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), expected to reach $15.6 million to $36.4 million in 2024 compared to $69 million in 2023 – at least a 50% decrease. EBITDA is a financial metric used to evaluate a company’s profitability and performance without considering financial and accounting decisions like interest, taxes, or non-cash expenses.

This drop in profit wasn’t without consequences for Evotec. The Hamburg company announced workforce reductions of approximately 7%, cutting 400 jobs globally to achieve cost savings of $42 million (€40 million) annually. Additionally, the company closed its gene therapy facility in Orth, Austria, and its chemistry operations in Lyon, France, while deeming certain manufacturing activities as non-core. These drastic measures were not just about streamlining but about survival, as Evotec struggled to manage its outsized fixed costs in an unfavorable market.

This vulnerability made Evotec a target of choice to be acquired.

Evotec in high demand

About two weeks ago, an Evotec investor made a move indicating it might be interested in buying out the company. The private equity firm, Triton Partners, raised its shares in Evotec up to nearly 10%, becoming its largest shareholder. 

Triton Partner’s intentions to acquire Evotec are more than hallway rumors. Indeed, Bloomberg reported that the private equity firm wants to meet with Evotec’s executives to discuss mergers and acquisitions (M&A). Still according to Bloomberg’s report, nothing’s decided yet on Triton Partner’s side, and the firm could very well decide not to make an offer in the end.

However, Halozyme Therapeutics, a drug delivery company based in San Diego, is done thinking about whether it wants to buy Evotec or not and has already made a bid on Evotec. Shortly after Triton became Evotec’s largest shareholder, Halozyme submitted an unsolicited proposal to acquire Evotec for $11.5 (€11.00) per share, valuing the company at approximately $2.2 billion (€2 billion). Halozyme highlighted that the acquisition would create a leading pharma services company with complementary platforms.

Halozyme Therapeutics leans more toward being a proprietary technology company, but it has strong service-oriented elements. Its primary focus is on developing and licensing its ENHANZE technology, which improves drug delivery by enabling subcutaneous administration of injectable biologics. While Halozyme owns its technology, it partners with major pharmaceutical companies – Roche, Pfizer, Janssen – to integrate ENHANZE into their therapies. This involves an element of customization and support, akin to a service model.

However, Halozyme just retracted its proposal. The San Diego drug delivery company didn’t change its mind but its acquisition offer did not find any favorable answer on Evotec’s side. “Evotec has been unwilling to engage with us to explore a potential combination and a company spokesperson has publicly commented that its goal is to remain an independent company,” said Helen Torley, president and chief executive officer (CEO) of Halozyme. 

But that doesn’t mean Evotec isn’t in a position to be receiving other offers. Although, for the time being, it seems Evotec wants to remain independent.

Evotec’s acquisition: What would it mean for the biotech industry? 

Unlike traditional CROs that primarily provide services, Evotec actively develops its own pipeline of therapeutics. This is achieved through its proprietary platforms and co-development partnerships with biopharma companies.

The Evotec pipeline spans over 200 co-owned assets, covering various therapeutic areas such as oncology, neurology, and metabolic diseases. Evotec also invests in early-stage biotech startups and academic spinouts, bridging the gap between research and commercialization. This side of Evotec is exemplified by its BRIDGE partnerships, which provide funding, mentorship, and access to Evotec’s platforms.

Evotec is one of a kind in the European biotech landscape – would its unique nature be carried out if it were to be acquired?

Evotec’s dual model creates a unique ecosystem where the company functions as both a service provider and a driver of innovation. An acquisition could lead to shifts in its priorities, potentially sidelining riskier but high-potential early-stage projects in favor of immediate revenue-generating activities. If the acquiring entity focuses more on short-term profitability, Evotec’s ability to invest in and support early-stage ventures could diminish, leaving a gap in the biotech innovation pipeline.

Indeed, startups and academic ventures that benefit from Evotec’s BRIDGE partnerships could face reduced access to funding, mentorship, and expertise if these programs are deprioritized by the acquirer.

Evotec’s collaborative pipeline model is also a key differentiator. A new owner might want to change the terms or focus of these partnerships, impacting the biopharma companies relying on these shared resources to advance their programs.

A change in ownership does not void the pre-existing contracts unless there are explicit clauses that allow renegotiation or termination upon a company’s acquisition. If such clauses exist, partners may have the option to revisit terms, renegotiate, or even terminate the agreement. 

In any case, the new owner could influence how future partnerships and co-development agreements are structured. This might involve prioritizing certain types of collaborations or altering risk-sharing mechanisms, shifting the focus away from the collaborative model Evotec is known for.

Beyond legal obligations and contract terms, changes in budget allocation or operational focus could reduce the support available for ongoing collaborations. Partners may also reassess their confidence in Evotec’s reliability or long-term commitment to shared goals under new ownership. Depending on the new owner, there might be competing interests between the new entity and certain existing partners. This could impact collaboration dynamics, even if legal agreements remain unchanged.

Evotec operates as an independent CRO. If acquired by a large player like a private equity firm or a rival biopharma company, Evotec’s independent role as an innovation hub could be absorbed into a broader strategy. A reduction in the number of independent CROs means fewer options for smaller biopharma and biotech companies to outsource their research, potentially increasing costs.

The CRO market includes a handful of dominant players, while smaller firms and specialized providers maintain a significant presence globally. As the U.S. shifts away from reliance on China, adding Evotec to the portfolio of an existing giant or aligning it exclusively with a single biopharma company could further consolidate market power and limit the diversity of service providers.

Without being added to an existing giant, an acquirer might emphasize Evotec’s CRO services, given their predictable revenue streams, over its riskier asset development and early-stage investment activities. This could lead to a narrower focus, reducing Evotec’s influence as a versatile player in the industry.

While it seems Evotec wants to remain a standalone company, the signs prompt us to keep a close eye on the situation and be prepared for an acquisition or at least some offers.