Long Ideas | Healthcare | Belgium
Galapagos' Quarterly Results: Gilead Profit Recognition And Important Catalysts For 2020
Oct. 29, 2019 10:31 PM ET|2 comments | About: Galapagos NV (GLPG), Includes: GILD
Robbe Delaet
Robbe Delaet
Growth, growth at reasonable price, contrarian
(377 followers)
Summary
Q3 2019 was a historic quarter for Galapagos, starting a long-term collaboration with Gilead Sciences.
We now have a clear view on the cash balance and revenue/profit recognition from the deal.
I will give an overview on potential catalysts for the coming year. GLPG1972 Phase 2 results and Filgotinib introduction are things to keep an eye on.
I still think Galapagos is undervalued, given its high cash balance (+60% of mkt cap) and important catalysts for 2020.
After its massive deal with Gilead Sciences (GILD), I re-initiated a big position in Galapagos (GLPG) at €145, based on its high cash balance and interesting catalysts for 2020. Galapagos has always been a strong performer, growing at a CAGR of 29% since its IPO in 2015. I expect this stock performance to continue over the coming years as its first drugs will reach the market. On 10/24/2019, Galapagos reported its Q3 results, in which it provided more information about the financial impact of the Gilead deal, which I will discuss. Additionally, I will provide an overview of important catalysts for the coming year. The coming months (excluding the R&D day) will be pretty quiet, while most of the catalyst will fall in H2 2020. As a consequence, it is possible that there will be more interesting buying opportunities in the short term. Even after rallying 9% after my last publication, I still think Galapagos is very attractive for long-term investors.
Financial impact of Gilead deal
As of Q3 2019, cash and cash equivalents stood at €5.6 bln ($6.2 bln), which is very close to my prior expectation. Currently, more than 60% ($6.2 bln cash, $10.23 mkt cap) of the market cap consists of cash, making the stock less risky. Interestingly, Galapagos provided some insight on how and when this cash will be recognized as profits. A one-time recognition of €667 mln came from Gilead exercising the option for GLPG1690, while this was partially offset by a catch-up effect on filgotinib (-€94 mln) as Galapagos is now contributing more to the filgotinib expenses. Consequently, Galapagos posted a strong profit of €265.3 mln, which is €4.77 per share.
Over the coming 4-5 years, Galapagos will recognize the cash based on the Filgotinib collaboration (€641.7 mln) and over the coming 10 years, the company will recognize obtained cash for sharing its potential future candidates with Gilead (€2,296.5 mln). In short, the company will recognize around €350 mln revenues (=profits) each year until 2024 and €230 from 2024-2029. These profits will support Galapagos' bottom line significantly over the coming years.
(Source: Galapagos Q3 results slides)
Galapagos' mid-term catalysts
In this section, I will provide an overview of important catalysts to look out for as a Galapagos investor. Obviously, the highly probable introduction in H2 2020 of Filgotinib (a best-in-class inflammatory drug) for Reumathoïde Artritis will be the biggest catalyst to look out for. As it is already widely expected that the product will reach the market, investors should look out for Filgotinib's label. Other competitive drugs, like Rinvoq from AbbVie (NYSE:ABBV), have black-box-warnings because of safety issues primarily related to thrombosis. In contrast, Filgotinib showed very strong results related to the number of thrombosis events and deaths during its trials. If this drug can get approved without any safety warnings, Gilead and Galapagos will have a very strong marketing benefit. This is what CMO Walid Abi-Saab said about it during the last conference call:
So, we believe that when we present the totality of the data to the FDA, we have a very strong case to make to support our hypothesis, not just pre-clinic, but we have very solid clinical data and also the rates of these thromboembolic events. But in the end, it would be a review issue that -- with the agency, and we look forward to have that scientific discussion with them around this point.
In my opinion, the GLPG1972 Phase 2 read-out for Osteoarthritis (OA) in the second half of 2020 will be a very important catalyst. At this moment, analysts still recognize few/no of its price target to this candidate due to its low probability of success. But if results are strong, this drug could potentially become one of the best sold drugs as it has a market of 118 mln patients who don't have a disease-modifying drug available. The granting of a fast track status by the FDA indicates there is a big need for a drug in this market. 850 patients are recruited for the study and the primary endpoint is reduction in cartilage loss at 52 weeks. This is a very exciting program.
The third important catalyst are the read-outs of Toledo studies. Toledo is code name for a novel target class discovered by Galapagos. According to CEO Onno van de Stolpe, this novel target is a once-in-a-lifetime opportunity. It will be interesting to see these very promising pre-clinical efficacy results (animal studies) will be visible in patients as well. Additionally, the company will probably release the target of Toledo, which management is so excited about. According to management, the target could potentially disrupt the whole biotech industry. The molecule would both stop the production of 'bad' anti-inflammatory-stimulating cytokines and increase the production of 'good' anti-inflammatory cytokines.
Galapagos will cast its yearly R&D day the 14th of November. During this day, the company will give additional insights on its current programs and potentials with its platform.
(Source: Galapagos Q3 results slides)
Investor takeaway
Galapagos keeps performing very well and now investors have more clarity about future profit recognition on the Gilead deal. In my last article, I pointed out that Galapagos is undervalued based on future Filgotinib cash flows solely. I re-initiated a position in this beautiful company with limited risk due to the big cash position. Even after the 9% gain, I still see enough upside for investors to initiate a position. Potentially, there will come more buying opportunities as the coming months will be pretty quiet (apart from the R&D day). Oftentimes, quiet periods go along with a negative stock performance for biotech companies. But the second half of 2020 will be very exciting with a lot of upside if GLPG1972 results surprise low expectations and/or Filgotinib gets approved without safety warnings.
Disclosure: I am/we are long GLPG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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