Bron: KBC securities door Jan De Kerpel.
News:
During its 3Q11 qualitative business update, Galapagos announced that its operational and financial results were in line with management expectations. The company reiterated that its financial guidance remains conditional to achieving certain R&D revenues.
The company reported earlier this week to provide the results of the phase II study in rheumatoid arthritis patients with GLPG0634 on 22 November. Before year-end, the proof-of-mechanism (PoM) results with GLPG0778 (a compound under the arthritis GSK alliance) will be reported and the phase I PoM results with GLPG0492 in cachexia will be completed. The company aims to achieve multiple alliance milestones and reiterated its ambition to outlicense one internal program before YE11.
Our View:
Galapagos’s development and partner projects continue to progress. While we have little doubt on the company’s healthy financial situation, we believe that Galapagos’s message of being cash flow positive cannot be underestimated. Indeed, in our view, the true added value and uniqueness of Galapagos’s investment case relies on the promise of generating cash through its hybrid business model. Unlike most other early-stage biotechs, this business model should allow the company to remain independent of the financial markets and move its drug development pipeline forward. But it should also allow substantial value creation for the company and its shareholders once clinical breakthroughs are realized.
We believe that many – especially generalist – investors are attracted by Galapagos for the unique opportunity to invest in a biotech that is operationally profitable and cash-flow-positive – and which therefore has low downside risk –but that offers what only biotechs can provide; the prospect of spectacular upside in the event of development successes. We fear that if the company fails to keep its financial promises, investors will be sorely disappointed, despite all the good progress in the clinical development.
Conclusion:
The 3Q11 update does not bring very new information and confirms our previous views on the investment case. The coming months will bring clarity on the R&D and alliance development, and from that, the achievement of the financial promises. We are expecting substantial R&D cash inflows (~€ 60-70m) from severalalliance partnerships, and especially from GSK. Indeed, if GSK opts to license in one of GLPG0778 or GLPG0555, this should result in a double digit million milestone payment. Also, if Galapagos can partner an internal program, upfront payments can be substantial, but this heavily hinges on the disease area and the stage of validation. In our opinion, the most lucrative deal can be struck with GLPG0634. As an example, we refer to the recent Portola –Biogen Idec deal on the licensing of small molecule SYK inhibitors (for RA and lupus) of which the lead molecule is only in phase I development. The deal included an upfront of $ 45m and $ 508m in development and sales milestones, plus a 25/75 split in costs and profits.sanderus