Initiating with a Buy Rating and $73 TP
Strong DARWIN Data a Prelude to ABBV Deal
We initiate coverage on Galapagos NV (GLPG) with a Buy rating and $73 target price. Our Buy rating is supported by the blockbuster opportunity for the company’s lead oral JAK1 inhibitor, filgotinib, for the treatment of rheumatoid arthritis (data released in April) and potentially Crohn’s disease (data 4Q15/1Q16). We believe the strength of the DARWIN 1 & 2 Phase II data in RA increases the likelihood of AbbVie exercising its opt-in rights on filgotinib in September and GLPG collecting a $200mn milestone payment. In addition, we believe the company’s rapidly advancing cystic fibrosis (CF) pipeline (also partnered with AbbVie) and GLP1205 for ulcerative colitis represent free call options for investors, with data in 2016.
DARWIN as good as INCY/LLY’s baricitinib; better than PFE’s tofacitinib
We believe results of DARWIN1 are similar to Phase III results from baricitinib’s RA-BUILD, with placebo-adjusted ACR20 and ACR70 scores of 24% and 16% versus baricitinib’s 22% and 15%, respectively. Filgotinib, like baricitinib, also has avoided malignancies and GI perforation, which were seen with tofacitinib. We await the presentation of RA-BUILD and RA-BEACON on June 11 to determine if there are meaningful differences in the safety profiles of baricitinib and filgotinib. Key areas of focus will include the impact on hemoglobin, liver enzymes, LDL/HDL ratio and incidence of severe infections.
Why Should AbbVie Opt In on filgotinib?
AbbVie is required to opt in on the filgotinib program if the DARWIN trials meet certain pre-defined criteria, which are not disclosed. We believe the only reason for AbbVie not to opt in is if it believes its internal JAK1 candidate, ABT-494, is better than filgotinib and if it believes the Humira patents can delay biosimilar entry. We believe both these questions are unanswerable prior to the September opt-in deadline, likely motivating AbbVie to move forward with filgotinib. Under the terms of the agreement, AbbVie would assume all development responsibility and pay Galapagos an estimated low-20% royalty.
Can AbbVie/Galapagos participate in CF?
We believe het-F508del is the primary opportunity for AbbVie/Galapagos given Vertex’s lead time in patients with homozygous F508del. We believe that het- 508del will likely require a triple combo (2 correctors + potentiator), and with Vertex’s 2nd gen corrector just entering clinic, GLPG may be only one year behind. We believe GLPG’s CF therapies could have better clinical outcomes versus Vertex’s, given preclinical assay data, and potentially capture $1bn of a $6bn WW hom-F508del market and $2–3bn of a $5bn WW het-F508del market. We estimate that the CF franchise could increase our DCF by $110 per share and therefore represents the single biggest source of upside to GLPG.